Thursday February 3, 2022 - 15:04:29 GMT
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Is the ECB Ready to Join the Rate Hike Party?
With the Bank of England raising interest rates for the second time on Thursday and the Fed likely to hike rates at its March meeting, the outlier has been the ECB. Regarding the latter, President LaGarde has continued to espouse that inflation is likely to be transitory and in December indicated that rates would stay unchanged during 2022.
Well, while it is too early to say the ECB will join the monetary tightening and rate hike party, there seemed to be cracks in her dovish armor at the press conference following the decision to keep rates unchanged. It almost felt like LaGarde was fearful of melting as she acknowledged that inflation risks were tilted upwards and changed her tune by saying that she would not commit to a change in interest rates at this time. LaGarde kicked the can to the March meeting when fresh economic forecasts would be used to evaluate the course of monetary policy.
Short-term German yields, which had been on the rise recently as markets priced in a rate hike this year, rose further as she spoke. This, in turn, saw the EURUSD surge higher in essentially a straight line move(see chart) as the forex market reacted to the firmer bund yields.
So, a market that had gotten used to a dovish ECB diverging with other central banks now has to consider the prospect of the ECB joining the party although likely to lag vs. other central banks (she said the ECB would not raise rates until asset purchases had ended). At a minimum, this should restore a two-way market to one that had looked to be one-way only a short time ago.
Jay Meisler, co-founder Global-View,com and creator of The Amazing Trader
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