ECB and Fed embrace doveish rhetoric ahead of central bank decisions

(Alliance News) - On Wednesday it seemed that the US Federal Reserve, alongside the European Central Bank, have both shifted towards more doveish approaches.

The Fed will make its interest rate decision on Wednesday next, followed by the ECB a day later.

Isabel Schnabel, once one of the European Central Bank's more hawkish voices, told Reuters that the central bank can take further hikes off the table. Roughly a month ago, she said another hike may have been an option.

"Policymakers will have no choice but to acknowledge next week that they may achieve their inflation target earlier than they had anticipated. Some may push back against expectations that the Bank will start cutting rates in the first half of next year, but we think President [Christine] Lagarde will concede that rate cuts may not be as distant as previously thought. We now think the ECB is most likely to start loosening monetary policy in around April and forecast the deposit rate to fall from 4% currently to 2.75% by the end of next year," Capital Economics analyst Andrew Kenningham commented.

Correspondingly, the DAX has risen to fresh heights this week.

City Index and Forex.com Fawad Razaqzada said: "The German index was at it again on Wednesday, when it reached unchartered territories above July's peak of 16,532. These moves appear to have been triggered by growing belief that the ECB will soon cut interest rates, having concluded the rate-hiking cycle."

A similar doveish rhetoric was issued in the US. Notably, analysts were discussing the prospects of US interest rate cuts after US job openings came in below market estimates.

The US labour market added slightly fewer jobs than expected last month, according to a tracker from payroll processing firm ADP.

ADP said sector employment increased by 103,000 jobs in November, easing from a 113,000 rise in October and falling short of the FXStreet cited consensus of 130,000.

The latest nonfarm payrolls report is on Friday, the ADP reading acts as a precursor. The Fed will then make an interest rate decision on Wednesday.

"Yesterday was all about markets fretting that the Fed would not cut rates anytime soon. Today they are back to believing that they will," said Hargreaves Lansdown analyst Steve Clayton.

"When the markets get optimistic about bonds and interest rates, that tends to boost the economy, potentially pre-empting the Fed's actual moves on interest rates. So, with the Fed wanting to be sure that inflation is truly tied down before it loosens policy, we're going to see this guessing game, where the market tries to position itself ahead of the Fed's next move, carry on some more. We're in the phoney war stage of the economic cycle."

By Sophie Rose, Alliance News senior reporter

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