Fed and ECB Aware of Impact of Diverging Strategies

The world’s top two central banks accept they will face periodic market jolts as they move in opposite policy directions, senior officials say, with such risks inevitable given the hugely differing fortunes of the U.S. and European economies.

The European Central Bank and U.S. Federal Reserve – which appear poised respectively to ease and tighten monetary policy – talk to each other regularly but do not coordinate policy or try to guess what the other may do next, the central bankers say.

The banks’ strategy is to factor in financial market moves that may result from their divergent paths without trying to counter them through monetary policy, they say.

The ECB surprised markets last month by raising the prospect of easing as soon as December. By contrast, with the U.S. economy in a buoyant state, the Fed delivered an unexpectedly hawkish message, boosting the chance that it will raise rates next month after keeping them near zero for almost seven years.

Together, these signals sent the euro EUR= down by more than 5 percent against the dollar in a matter of weeks, and this is unlikely to be last sharp market move as a number of leading central banks act.

A Fed increase is likely to be followed by the Bank of England sometime next year as the British recovery gathers strength. But growth is anemic in the euro zone and slowing sharply in China, where the People’s Bank of China is already easing policy. The Bank of Japan and the Reserve Bank of Australia have also both flagged the potential for more easing.

via Reuters

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza