FOREX-Euro jumps as record inflation adds pressure on ECB

Band Joice Alves

LONDON, February 2 (Reuters)The euro appreciated for the third day in a row on Wednesday, break away a 20-month low last week as eurozone inflation hit a new record high last month, fueling bets that the European Central Bank could raise interest rates sooner than expected.

At 5.1% in January, price growth is more than double the ECB’s 2% target.

The euro has fallen nearly 8% in three months, rattled by expectations that the ECB will be the last major central bank to raise interest rates after ignoring inflation for months and arguing that factors temporary contracts were behind the rise.

The euro strengthened 0.45% against the dollar at $1.13245, touching a nine-day highas investors weighed the chances of the ECB signaling a faster lane for policy tightening at its Thursday meeting.

Ulrich Leuchtmann, head of foreign exchange at Commerzbank, said the money market was now pricing in an ECB rate hike for the final quarter of the year.

In the short term, the impact on the euro will depend on what ECB President Christine Lagarde has to say on Thursday, he said.

“Some market participants will expect the ECB to look hawkish tomorrow,” Leuchtmann added.

Shaun Osborne, chief currency strategist at Scotiabank, said the ECB was in an “uncomfortable position” but he expected it to stick to its no-hike forecast this year, ” which will remain a brake on the euro”.

In the meantime, the dollar fell from a 19-month high reached against a basket of currencies =USD last week as US Federal Reserve officials warned of potentially aggressive rate hikes this year.

A chorus of Fed officials said it would raise interest rates in March but spoke cautiously about what might come next, indicating a desire to keep options open given the uncertain inflation outlook.

The dollar fell for a third day against its peers, slipping 0.4% to 95.875, with a rally in global equity markets undoing some of its safe-haven allure.

The pound rose 0.3% to hit a 12-day high against the dollar at $1.3571 ahead of a Bank of England policy meeting on Thursday.

Investors fully priced in an expected BoE base rate hike of 25 basis points to 0.5% on Thursday. BOWATCH

euro against dollar

(Reporting by Joice Alves editing by David Goodman, Frank Jack Daniel and Chizu Nomiyama)

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