ECB has to act in a particularly restrictive manner to re-establish the confidence of FX market – Commerzbank

To what extent does the fiscal situation restrict central banks? And what does that mean for the FX market? Economists at Commerzbank analyze the fiscal situation in the US and compare it to that in Europe.

25 or 50 bps make very little difference

Will the Fed gather from higher US yields that this has created sufficient restrictive effect? So that the rate path does not have to be raised even if inflation developments are disappointing? That would lead to a deterioration in the relation of interest rate and inflation levels and weaken the USD.

Will the ECB consider the rise in yields, in particular the disproportionate rise in yields in those Eurozone countries with high debt levels to constitute an argument against higher yields? 

To re-establish the confidence of the FX market in the ECB which has been weakened over the years, the central bank would have to act in a particularly restrictive manner under Lagarde’s leadership. It was unwilling to do that most recently. 

Of course, from a material point of view, 25 or 50 bps make very little difference; but in this case, they demonstrate that the ECB does not want to believe that it is affected by a credibility deficit which is becoming increasingly relevant again in times of growing doubts about fiscal stability.