FOREX-Euro expects best week since COVID-19 hit after ECB’s hawkish turn

Band Alun John

HONG KONG, February 4 (Reuters)The euro was heading for its best week since March 2020 and testing a nearly three-month high after Thursday’s hawkish shift in the European Central Bank fueled speculation over the pace and timing of rate hikes.

Although the ECB kept rates unchanged as widely expected, the euro climbed 0.26%, hitting as high as $1.468 in Asian trading on Friday in reaction to ECB President Christine Lagarde acknowledging the risks rising inflation rates and refusing to repeat previous forecasts that an interest rate hike this year was extremely unlikely.

Europe’s single currency rose 2.86% on the week, its best weekly gain since March 2020, when the pandemic began. A break above $1.1482, a level last seen on Jan. 14, would be the euro’s strongest since mid-November.

“Lagarde has opened the door to a new round of tightening starting with the ECB this year. The market has pushed in that direction a bit, but the fact that the president has acknowledged that is a big deal,” Rodrigo Catrill said. , senior FX strategist at National. Bank of Australia.

The ECB had been considered one of the most accommodating of the world’s major central banks.

Sterling GBP=D3 was at $1.361 after hitting a two-week high of $1.3626 on Thursday after the BoE raised rates by 25 basis points and nearly half of its policymakers wanted a bigger hike to contain runaway inflation .

As a result, the dollar index =USDmeasuring the greenback against six major peers, was at 95.169 after falling 2% this week – its biggest weekly decline since March 2020.

This is a sharp reversal after the index gained 1.65% a week earlier, when traders shifted positions as they braced for faster-than-expected rate hikes from the Federal Reserve. Markets are now pricing in five US rate hikes this year.

U.S. nonfarm payrolls data is due later Friday, though it is expected to show a sharp slowdown in job growth due to the spread of the Omicron strain of COVID-19 in January , the data will not be as crucial for the Fed as in the past, as the focus is more on inflation.

“We have told our clients that they should be prepared for more volatility in the currency markets and in the markets in general when the major central banks begin to enter a new price cycle, and that is what we we’ve seen dramatically in the dollar in recent weeks,” Catrill added.

“Markets are starting to wonder not only when (central banks) will go up, but more importantly how fast and how far they will go up. This is not just a Fed story now, it is also a Bank of England, a history of the ECB and even a history of the RBA.”

The governor of the Reserve Bank of Australia said Wednesday that a rate hike this year was possible, while saying there was a rare opportunity to achieve full employment that warranted patience.

Friday’s RBA monetary policy statement did little to change that picture, leaving the Australian dollar AUD=D3 at $0.7151.

The yen was at 114.88 to the dollar as yields on benchmark Japanese 10- and 5-year government bonds hit six-year highs at the start of trading in Tokyo, with analysts beginning to speculate that even the Bank of Japan may have to follow its peers and tighten monetary policy.

World exchange rates

(Reporting by Alun John; Editing by Edwina Gibbs and Simon Cameron-Moore)

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