Euro climbs after ECB’s ‘revolutionary’ hawkish shift – Markets

LONDON (Reuters) – The euro was on course on Friday for its best week against the dollar since the COVID-19 pandemic hit, after a hawkish turn by the European Central Bank (ECB) sent waves shock in the markets.

Rampant inflation in many global economies forced central banks to tighten monetary policies that had been eased significantly to help consumers and businesses weather the financial blow of the pandemic.

The ECB had resisted the tide. But on Thursday, despite rates remaining in negative territory, Chairwoman Christine Lagarde acknowledged rising inflation risks and opened the door to possible rate hikes later this year.

Pound close to 23-month high against euro

“The fact that the ECB has now signaled a more urgent path to a rate hike for the first time in a decade is…of groundbreaking significance,” Deutsche Bank currency analysts said in a note.

“Europe has lived with negative rates for almost a decade. When the ECB signals that this may change, it matters. It will take a long time for the full impact to be felt, and we should expect a few surprises along the way.”

The euro gained three cents against the dollar this week to just below $1.15 – its best weekly gain since March 2020. It was up 0.2% on the day at $1.14565.

The strength of the euro was reflected in the weakness of the dollar index – as it trails the greenback against six major rivals, including the euro.

The dollar index is on track for a weekly decline of around 2%, its worst performance since the pandemic. It was last at 95.327.

U.S. jobs data is due later Friday, which could give investors clues about how quickly the Federal Reserve will tighten policy.

Markets are now pricing in no less than five US rate hikes this year.

The pound was also among the big currency moves this week, after the Bank of England raised rates to 0.5% on Thursday – marking the central bank’s first consecutive increases since 2004.

The pound is on track for a weekly gain of more than 1% against the dollar, although it lost ground on Friday and traded just below $1.36.

A safe haven currency, the Japanese yen remained broadly unchanged that day at 115.020 yen to the dollar.

On Friday, Australia’s central bank revised its inflation outlook sharply upwards, but kept policy very loose as it seeks a sustained recovery in wages and living standards.

The Australian dollar fell on the day and was last down 0.4% against the US dollar at $0.71105.