(Bloomberg). — The market fell and bonds rallied, as traders reduced their bets about longer-term interest-rate increases after the European Central Bank increased by a jumbo 75 base points for a second consecutive gathering.
The euro dropped as low as 0.9% to drop below parity shortly after the decision. This brings the deposit rate up to 1.5%. Markets have been anticipating a rise of this magnitude for weeks as policymakers attempt to control record inflation.
The ECB stated it expects to raise interest rate further, but it was a little less hawkish. Money markets were able to reduce rate-hike bets by up to 20 basis points, pricing a maximum below 2.75% next fiscal year. Compare this to the above 3.25% last week.
“The doves today have won some flexibility in forward guidance,” said Nomura Inc. currency strategist Jordan Rochester. “It’s not just an inflation story anymore. Combine this with the BOC yesterday and it’s looking more and more like a global central bank pivot.”
The Bank of Canada hiked rates by 50 basis points on Wednesday, a smaller-than-expected move.
Traders’ attention is now turning to ECB President Christine Lagarde’s press conference, and in particular any indication of whether policy makers may deliver a smaller hike in December.
All German bonds saw gains. The note — among the most sensitive to interest-rate changes — led the rally, sending the yield as much as eight basis points lower to 1.86%. It had risen by as much as 11 basis point earlier.