The European Central Bank (ECB) and the Bank of England (BoE) last week introduced "forward guidance" as the new tool of monetary policy. The move was a big change, particularly for the ECB, and the forex market reacted accordingly. I think it was just the first in what's likely to be a series of steps from these central banks in the same direction. That suggests that both the euro and sterling are likely to decline further down the road.
Forward guidance means giving the markets clear guidance about what the central bank intends interest rates to be in the future. Such guidance is crucial, because investors form their intentions not only by the current level of interest rates but even more by what they perceive the future path of interest rates is likely to be. By shaping investors' views of the future path of rates, central banks can influence their views on the likely path of the economy, inflation, and financial markets. It reduces the uncertainty surrounding the future, which should increase risk-taking.
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The simplest way of giving forward guidance is to give a rough idea of how long interest rates are likely to remain low. That's what ECB President Mario Draghi did. He said that "the Governing Council expects the key ECB interest rates to remain at present or lower levels for an extended period of time." That might not seem like much – indeed, it might seem like exactly what everyone in the markets was already expecting, given the weakness in the euro zone economy - but for institutions whose mantra up to now has been that it "never pre-commits," it's a big deal.