After the Fed, it's time for the Bank of England and the European Central Bank

After yesterday's Fed decision and press conference, we are now looking to the Bank of England and the European Central Bank to outline their announcements regarding the timing of their own rate hike cycle.

The Bank of England fights inflation

Starting of Bank of England, MPC faces a dilemma as the UK economy continues to struggle with double-digit inflation, although it may not be as bad as thought late last year, which could prompt a slight revision to some economic forecasts. The fall in energy prices in recent months has eased the pressure somewhat, but with food price inflation still at 16%, core inflation will be much higher than it should be.

There are the usual concerns about the impact of another 50 bp move on mortgage costs, but the 5Y bond yield has barely moved from its lows set in November, although the 2Y bond yield is higher.

Regardless of what we get today, we're likely to see a split again, with the likes of Tenreyro and Dhingra likely to be the most averse to another hike as they voted no change in December.

Catherine Mann will seek a 50 basis point hike while the rest of the committee should split between 25 and 50 basis points from the current 3,5%. If we get 50bps, will the Bank of England signal it's over and signal a pause? Or will it raise rates by 25bps and signal that we are in for more hikes? With sticky base prices and wage growth of more than 7%, any delay by MPC on forward guidance could do more harm than good.

Regardless of what we hear today, history has taught us that this is unlikely to help the pound in the short term, given the tendency of the Bank of England to lower the pound at every meeting. The pound is also under pressure thanks to the belief that the Bank of England is much closer to the end of its rate hike cycle than the ECB.

What will the ECB do today?

After the Bank of England, it was the turn of European Central Bank and here there is no doubt that today we will see another 50 bp rate hike. It is what comes next that is likely to dominate today's events. After the release of the ECB's final minutes, it became clear that many members of the governing council wanted a much more aggressive approach, pushing for a 75 bp hike.

Following the recent Davos Economic Forum, ECB President Lagarde repeated her December message of multiple rate hikes, saying that inflation is still too high and markets are underestimating the ECB's determination to bring prices back to 2%. This hawkish message is unlikely to be mitigated despite the recent drop in inflation to 8,5%, given that core prices remained at a record high of 5,2%. At the December ECB meeting, Lagarde tentatively committed the ECB to at least 3 more 50bp rate hikes over the next 3 meetings, which made the euro soar higher and finally broke the level of 1,1000, although this happened mainly as a result of market reaction to yesterday's decision the Fed, not the internal strength of the euro.

This would suggest that markets are still unconvinced that the ECB will be able to deliver the number of hikes indicated, given the risk this may pose to the borrowing costs of more indebted eurozone members.

How can individual currency pairs react?

When estimating potential pip volatility for major currency pairs, keep in mind that this volatility also includes tomorrow's US jobs data (NFP). Recalculated implied volatility from overnight options for EUR / USD is 132 pips, for USD/JPY 166 pips and 158 pips for GBP / USD with data from 09:00 CET. Implied volatility estimates in what range +/- the odds can stay for almost 70 percent. time.