Both the eurozone and the UK are likely headed for a recession so the European Central Bank (ECB) and the Bank of England (BoE) will likely miss market pricing for rate hikes, weighing on the EUR and GBP. Even if there were an accelerated and front-loaded tightening, any currency gain would unlikely be sustained, in the view of economists at HSBC.

EUR and GBP will likely face downside pressures over the medium term

“The ECB and the BoE may find it hard to match market pricing for rate hikes, weighing on the EUR and GBP.”

“Even if the ECB (or the BoE) were to deliver an outsized rate hike), we are not convinced that it would be positive for the EUR (or the GBP) beyond the knee-jerk reaction. An accelerated and front-loaded tightening would likely exacerbate growth concerns and possibly raise the risk of policy reversal in 2023.”

“More and more, the EUR and GBP seem to recognise that hiking into weakness is rarely positive. With risk aversion to be elevated amid continuing concerns about global growth, we look for both currencies to slip in equal fashion against the USD, albeit without reaching new year-to-date (YTD) lows in the coming few weeks.”