Reuters: US Dollar Report: RPT-ECB rate cut bets fade, Fed still seen tightening first

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RPT-ECB rate cut bets fade, Fed still seen tightening first Aug 15th 2013, 05:34 Thu Aug 15, 2013 1:34am EDT By Emelia Sithole-Matarise LONDON Aug 14 (Reuters) - Money markets are pricing out expectations of another European Central Bank interest rate cut as the euro zone returns to growth, though it is still seen lagging the United States and Britain in tightening policy. Forecast-beating growth in the currency bloc's two largest economies, Germany and France, led the euro zone out of its longest recession to date in the second quarter, data showed on Wednesday, following on the heels of robust manufacturing numbers last week. The improved economic outlook has led to a rise in short-term money market rates, as investors see less reason for the ECB to cut interest rates from their record low of 0.50 percent any time soon. Forward-looking Eonia rates have risen across the strip as investors price out a rate cut, with overnight Eonia rates seen rising to around 0.15 percent in December compared with the current 0.08 percent. The forward Eonia curve has steepened, as the rates indicated by contracts covering ECB meetings for the first half of next year have risen over the past two weeks more sharply than for near-term dates. "If the data continues to go in this strong direction, rate cut speculation will soon be a thing of the past," one money markets trader said. The shift in euro zone money markets mirrors moves in U.S. and UK markets where firm domestic economic data has bolstered expectations that rates may not stay at rock-bottom levels for as long as suggested by their central banks. Investors brought forward expectations of when UK interest rates would rise after data on Wednesday showed an improving job market and a surprise split among Bank of England policymakers over its forward guidance. UK money markets are now pricing in a greater chance of a rate hike in 2015, a year earlier than suggested last week by the Bank of England. Wednesday's move takes markets' view of the BoE rate outlook back to where it was in late June, just before Canadian Mark Carney became BoE governor and called a rise in short-term money market rates "unwarranted." While scope for further easing may be waning, the ECB is still seen among the last of the world's major central banks to start hiking rates as the recovery in the euro zone is expected to lag U.S. and UK growth despite the strong showing by Germany. The gap between rates implied by forward euro overnight index swaps and three-month Euribor for 2015 has widened 7-8 basis points to 70 bps since early August. Commerzbank strategist Benjamin Schroder said this suggests the ECB could start raising borrowing costs at the end of 2015 rather than in early 2016 as indicated a couple of weeks ago. The U.S. Federal Reserve sparked an initial rise in bond yields and money market rates in June after it outlined plans to start cutting back its economic stimulus later this year. Fed fund rates are projecting a U.S. rate rise in early 2015. "We still expect this year to be a struggle in the euro zone and also next year," said Societe Generale economist Anatoli Annenkov. His team would review in September its current expectations for another ECB rate cut this year. "Looking at unemployment rates we think there's still a big grip on economic activity, especially in southern Europe, and we are concerned we will see headwinds from fiscal consolidation still needed in many countries." Link this Share this Digg this Email Reprints

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