ECB may be forced to refrain from hiking rates for longer than market is pricing in - Rabobank

Rabobank's Financial Markets Research Team explains that though perhaps not intended as such, the market’s hawkish interpretation of Draghi’s speech in Portugal more than offset the dovish reaction to his remarks during the ECB press conference earlier in the month.

Key quotes:

"The European equivalent of ‘taper tantrum’ triggered by Draghi’s Sintra speech was particularly visible in bond markets, which sold of sharply, and a sharp appreciation of the euro, reaching 1.1445 against the dollar."

"On the money market front, there certainly were implications as well. There was a marked steepening in Eonia forwards, with the +24m forward currently around -10bp; reflecting a 25bps increase from current rates."

"We would caution that this curve steepening may be somewhat overdone. Whilst we agree with the market’s interpretation that a tapering announcement is likely to follow in the second half of the year, this does not necessarily imply a substantially more hawkish ECB on rates. As we’ve been stressing, a decision to taper asset purchases is probably at least partially driven by technical factors, as opposed to a better inflation backdrop. Tapering then adds to the risk that inflation remains below target for longer, and as such, the Governing Council may be forced to refrain from hiking rates for longer than the market currently seems to be pricing in. Indeed, to the extent that tapering could lead to a stronger euro, higher rates and credit spreads, this also highlights the risk of an unwarranted tightening of financial conditions."