ECB Forward Guidance Dominates/ To Be Mirrored by the Fed?

Today's long-awaited ECB easing was superceded by Draghi's expectation that interest rates will not be cut again.   In other words, forward guidance was more important than the actual policy change.  This dominance of forward guidance may very well happen again at next week's FOMC meeting.  As I discussed on my February 28 blog post, "A Fed Hawk and Dove," a downshifting in the "dots" may accompany a rate hike on March 16 -- and the downshifting may be the most important element of the policy announcement.

If this happens, the "divergence" trades -- betting on a tighter Fed versus an easier ECB -- would be turned on their heads.    The dollar should weaken and stocks rally.   While short-term yields should rise, it is not clear whether the Treasury curve will flatten or not.   Expectations of future short-term rates would be lower, but inflation expectations higher.