📝 ECB And Fed Priced To Tighten About The Same By Q4 2023: Westpac

The repricing in recent weeks has been such that by early Q4 2023 both central banks are now expected to have cumulatively tightened about the same: by 180bp. To be clear, the level of ECB’s deposit rate is of course not expected to match the level of Fed Funds. The divergent Fed and ECB policy paths priced in from mid-2023 onward raises eyebrows, but it’s entirely consistent with past cycles. As shown in slide two, the Fed has consistently led the ECB with more aggressive policy hikes. But, the Fed has also consistently led the ECB with speedier and deeper rate cuts, all but closing the prior ECB-Fed policy gap. In short, there’s a lot of precedent for the diverging shape of the ECB and Fed OIS curves for 2022 and 2023. The DXY index has given up about 1/3 of its 9.9% year to mid-May gains, and one wonders whether a deeper setback could be in store if markets settle more deeply into the idea that by between now and end-2023 the ECB and the Fed will have delivered the same amount of cumulative hikes.