ECB, BOE Will Soon Dance to the Music of the Fed

At first glance it looks as if both the European Central Bank and the Bank of England ignored the Federal Reserve's decision Wednesday to slow the pace of interest-rate increases. Both central banks raised official rates by 50 basis points on Thursday and maintained a hawkish outlook on inflation. But hold their respective statements up to the light and it's clear that a peak is approaching faster than policymakers at either institution are currently willing to concede. A central bank pivot, or perhaps a pirouette, is in sight.

The euro and sterling money markets have chosen to look straight through the hawkish rhetoric of their respective domestic central banks in anticipating an early end to the current hiking cycle, paying more attention to the tone set Wednesday by Fed Chair Jerome Powell’s press conference following the decision to slow the rise in US official rates to just 25 basis points. By not pushing back against market expectations for an impending pause in tightening, Powell added fuel to a fixed income rally that’s seen yields fall sharply everywhere.