(Kitco News) - There has been lots of central bank talk over the last few days most notably from the ECB and Fed. The overriding theme is the fact that interest rates could go higher in both cases. There have been a few new surprise views that should be taken note of. First of all, ECB's Wunsch said that a 50bps hike would be comfortable (soon) and that 200bps worth of hikes is needed relatively fast. Markets are pricing in about 238 bps of cumulative rate hikes by mid-2023 compared to the around 280 bps they anticipated two weeks ago. Wunsch also said if fiscal policy is more supported then the ECB will have to do more.
In terms of the Fed, Mester said it would be a more costly error to assume that inflation expectations are anchored when they are not. Mester added that policymakers cannot be complacent about a rise in longer-term inflation expectations. Not finished with this, she then said U.S. inflation could rise further from now. This all could suggest a more hawkish stance than previously thought.
EUR/USD has taken a dip down in the last two sessions. Earlier in the European session, the price traded as low as 1.04855 but has since recovered to take hold of the 1.05 handle. There is some divergence between the two central banks at the moment and this is putting pressure on the ECB. The ECB also has to deal with the fragmentation issue and the war in Ukraine has more impact due to the proximity. ECB's Wunsch has now said that 150bps is reasonable by March and that a quarter-point hike in July is a done deal. The comments from the central bank will now be under a microscope as traders search for clues to see if the policies will balance out. As for ECB President Lagarde, her comments suggest that the ECB should continue to be nimble in the market environment. This is somewhat different from ECB’s Kazaks who believes it is worth looking at a larger rate hike in July.
