ECB Laid the Ground for Higher US Rates But Its all Up to the Fed

Mario Draghi has opened a door. Janet Yellen has to decide whether she wants to walk through.

The European Central Bank president signaled last week that policy on his side of the Atlantic is going on hold as officials wait to see how their stimulus measures play out. That pause may hand the Federal Reserve chair an opportunity to raise interest rates in coming months, by reducing the risk of a sharp rally in the dollar if the policies of the two central banks conspicuously diverged.

“The reality for the ECB is the euro zone isn’t in nearly as bad a shape as Draghi would like to make out — it pushes the currency and gives the Fed far more room to move,” said Rob Carnell, chief international economist at ING Bank NV in London. “Sometime in the third quarter sounds like a reasonable bet for me but I wouldn’t rule out the second quarter.”

Investors see zero probability the Federal Open Market Committee will hike at its April 26-27 meeting and only a 20 percent chance of a move at its gathering in June, eight days before Britain holds a referendum on whether to remain in the European Union. A vote by U.K. citizens to depart could trigger financial-market turmoil and is a source of uncertainty that may give the Fed pause. The likelihood of a move in July is 34 percent, according to prices in federal funds futures contracts.

via Bloomberg

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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 has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. 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