When will the European Central Bank tighten money? Austrian Ewald Nowotny, one of its governors, said yesterday to Reuters that the ECB should get on with it now: hike interest rates and stop buying bonds. The ECB then disowned the remarks. A spokesperson for the bank said Nowotny spoke only for himself.
The ECB is attempting a complex dance to get hawkish without out spooking FX traders and driving the Euro higher, possibly even derailing the European economic recovery. Current popular thought is that the ECB will reveal its plans for rates and bonds in June-July. We anticipate (with relative confidence) the bank will reduction bond buying to zero in September. However, even marginal slowing in European economies could delay action.
ECB governors must envy the US Federal Reserve, which with quasi-stealth unwound its own, massive Quantitative Easing and raised interest rates without spiking the USD. Former Fed Chair Janet Yellen’s near-magical abilities teased the prospect of rising interest rates without strengthening the USD. The ECB should take a page from the Fed. Talk down economic quality (not difficult, considering negative surprises in Eurozone) while moving toward the exits. The EUR/USD pair corrected from a two-week high of 1.2396, primarily due to fears of US-Russia war over Syria. This is an opportunity to reload EUR/USD longs.
By Peter Rosenstreich