MUFG Analysis: Aggressive Rate Hikes by BOE and ECB May Only Offer Fleeting Support to Pound and Euro

According to Lee Hardman of MUFG Bank, if the Bank of England and the European Central Bank implement more aggressive interest rate hikes than currently anticipated by the market, the British pound and the euro could struggle to sustain any resulting gains. While faster rate increases might provide some short-term support for the currencies, "those gains would ultimately prove short-lived if tighter monetary policy, combined with higher energy prices, triggers a deeper economic slowdown or recession within European economies." Weak growth momentum, as indicated by purchasing managers' surveys for the UK and eurozone released on Tuesday, may temper expectations for more aggressive tightening. However, Hardman noted that if inflationary pressures prove more persistent, the BOE and ECB could still proceed with rate hikes.