Rate Taming Still Needed
Messrs Carney and Draghi’s hopes for a simple final meeting before the summer break may have been dashed by the FOMC’s latest assessments. Although no immediate opinion was proffered on tapering, markets are well aware that the Fed’s corresponding stimulus withdrawal schedule is far from certain. For Chairman Bernanke’s counterparts, this also means that they cannot count on the speedy commencement of a dollar rally to serve as currency-led stimulus for their own economies. As such, it is back to square one and extra effort is needed to ensure that rhetoric will cap currency performance and (relative) rate expectations. Yet, it will be harder compared to July as data on both the activity and price front have both started to improve. Leaving the fundamentals aside, our rates teams have stressed the need for markets to not underestimate the resolve by central banks to tame short-end interest rates. This is necessary to check currency momentum, but not sufficient; the currency itself must be responsive, and we have seen a clear divergence in the relevant relationships for the UK and Eurozone.
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