Euro Racks in Gains Against Dollar as ECB Liffoff Expectations Gather Pace

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Euro Racks in Gains Against Dollar as ECB Liffoff Expectations Gather Pace
Credit: © Reuters.

By Yasin Ebrahim -- The euro surged against the dollar Thursday as the release of the account of the European Central Bank’s April meeting showed concern over inflation had tipped dovish members of the central bank into supporting a quarter percentage point rate hike as soon as July.

EUR/USD rose 1% to $1.0585.

"Net asset purchases should be ended as soon as possible, opening the possibility for a first interest rate hike shortly after," the accounts of the ECB’s April 14 meeting showed on Thursday. "The view was expressed that the criteria for interest rate hikes were already clearly met.”

The ECB in April decided to defer its decision on whether to end asset purchases in June, preferring to wait for incoming economic data, particularly on inflation. But incoming data since then has sparked some concern among dovish ECB members that inflation, particularly wage inflation, could become entrenched if not addressed through policy tightening.

“Since then [the April] meeting quite a few of the more dovish ECB Council members have apparently changed their mind,” Commerzbank said. “In recent days, these members have signaled their support for a first rate hike in July, after having decided to stop net asset purchases at the June meeting.” 

While there remains uncertainty about the pace of monetary policy tightening, the account of the ECB's monetary policy meeting suggested an “increasing number of policymakers now in favor of relatively swift and sustained normalization,” Daiwa Capital Markets said.  

The backdrop of growing expectations for the ECB to shift to a more hawkish stance on monetary policy sets a high bar for a hawkish surprise that could see the euro lose steam against the dollar.

“We also believe that markets are pricing in too much tightening by the ECB – though not by the Fed – and expect the theme of growth divergence (exacerbated by the EU-Russia standoff on commodities) to become more relevant into the summer,” ING said in a note earlier this week.

“With this in mind, we suspect that any further rally in EUR/USD may start to lose steam around the 1.0650-1.0700 area, with risks of a return below 1.0500 in the near term being quite material,” it added.

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