Draghi, Carney Lash at Bernanke’s Taper

<p>Both Draghi and Carney unleashed carnage in their own currencies as they warned against the growth repercussions of rapid rise in market interest rates. Said […]</p>

Both Draghi and Carney unleashed carnage in their own currencies as they warned against the growth repercussions of rapid rise in market interest rates. Said otherwise, both central bankers are concerned at their economies’ inability to handle soaring borrowing costs, stemming from Fed Chairman Bernanke’s candid assessment in suggesting that reducing asset purchases will begin this year.

ECB Finally Embarks on Forward Guidance

As central banks run out of tools (zero interest rates), the dependence on words and semantics increases. And as ECB rates linger at zero, the ECB finally issues forward guidance, borrowed a phrase long used by the Fed in stating: “monetary policy stance will remain accommodative for as long as necessary. The Governing Council expects the key ECB interest rates to remain at present or lower levels for an extended period of time.”

Draghi described the step on forward guidance as “unprecedented”.

Why so Dovish?

Draghi’s usual reference to low inflation was highlighted via “subdued monetary dynamics” as well “broad-based weakness in aggregate demand”.  But the decision to resort to forward guidance in ensuring rates remain low is the verbal equivalent of announcing Outright Monetary Transactions, whose goal was to rein in soaring Spanish and Italian bond yields.

As important as it is for the ECB to stimulate the macroeconomy, Draghi’s chief priority remains stabilizing sovereign borrowing costs, with particularly Italy’s €2.0 trillion sovereign bond market.  Draghi had little choice to contain advancing yields stemming from Bernanke’s tapering comments and Portugal’s political instability. Portugal’s 10-year yields hit the 8.0% level for the first time since 7 months, posting 7 straight weekly advances-the longest in 3 years.

Carney Makes his Mark

GBPUSD fell more than 2 cents, posting its biggest decline in 18 months after the Bank of England introduced a change under its new governor Carney by releasing a statement on the economy, accompanying the usual announcement on interest rates and asset purchases. The statement was unusually dovish, indicating: 1) economic slack expected to continue for some time; 2) rising market rates weigh on outlook; 3) inflation should fall back further out.

The statement aimed at alleviating the run-up in yields, emerging from improving economic data as well as similar moves in global bond yields. While we expect EURGBP to extend advances to 0.88, the path to 1.2770s in EURUSD, suggests 1.45 is a viable target by year-end.

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.