The ECB and BoE declared independence from US monetary policy, Credit Suisse says
Credit Suisse’s research team presents its report following the ECB forward guidance announcement.
The ECB and BoE declared independence from US monetary policy. By taking unprecedented steps to provide forward guidance the European central
banks communicated to markets that they would not validate the recent Fed
induced increase in rates.
In Strategy, we see room for the front end to rally further following the ECB’s
unprecedented move. We favour EUR 3s30s steepeners to position for this.
Looking forward, we expect the market to question the ECB’s resolve in
anchoring the front end if data continues to surprise positively.
In the UK, we favour selling £ 4th Libor-Sonia basis as a protected way to
position for forward guidance. We recommend this selling £ basis versus
buying USD basis.
The introduction of ECB-style forward guidance saw the Euro fall heavily in
post announcement trading. Notwithstanding the recent move, however, the
single currency remains well within the 1.28 to 1.36 range seen so far this
While efforts to keep yields lower than in the US may limit the upside to
the Euro over coming months, we remain of the view that the market would
need to begin pricing “break-up” risk again to push the Euro out of the bottom
of this range. Indeed, given that the Euro is now at the bottom of the recent
range, we feel that the risk over the coming month or two is that it once again
confounds the bearish market consensus and rallies back above 1.30 over coming months.
click here to read full report [asset_library_tag 6834,European Economics and Strategy]