Euro hits 10 month-high on dollar, as central banks chart divergent courses

SINGAPORE/LONDON – The euro sat at a 10-month high against the dollar on Thursday, ahead of a European Central Bank meeting at which markets expect a half-percentage point rate increase, a day after the U.S. Federal Reserve slowed the pace of its rises to 25 basis points.

The Fed also said it had turned a corner in the fight against inflation, its first explicit acknowledgment that price increases are slowing, underpinning market expectations that the end of the central bank’s rate-rise campaign is near and cuts could follow.

The dollar’s most dramatic overnight dive came after Fed Chair Jerome Powell told a post meeting news conference that “the disinflationary process has started”, although he also signalled that interest rates would continue rising and that cuts were not in the offing.

“It was very much a sort of relief … that there was nothing there to really seriously challenge the market’s prevailing view,” said Ray Attrill, head of FX strategy at National Australia Bank (NAB).

“(Powell) said that rates are going to have to be restrictive for some time, but that doesn’t dissuade the market from saying some time might be six months, rather than two years.”

The Bank of England also meets on Thursday, with its rate decision due at 1200 GMT before the ECB’s at 1315 GMT. Markets also expect a half-point increase from the British central bank.

Sterling, which rose 0.47 percent on Wednesday, held at $1.236, and the dollar slid against the Japanese yen, dropping to as low as 128.07, its lowest in two weeks.

The euro hit $1.1034 in Asian trading on Thursday, its highest since April 4, having jumped 1.2 percent on Wednesday. It was last at $1.100, broadly flat on the day, as the focus turned to the ECB meeting.

“A 50bp hike is widely expected as is a hawkish message that will support market pricing of a further 75-100bp of tightening into the summer,” said Chris Turner global head of markets at ING in a note.

“A sharp narrowing in rate differentials stands to become a bigger driver of EUR/USD this year and should carry it to the $1.15 area in the second quarter.

Turner said the derivatives market shows the smallest premium in dollar rates over euro equivalents since late 2021.

Also among the sharper Wednesday movers were the Australian dollar, which gained 1.2 percent on the day and hit a new eight-month high of $0.7158 in early Asia trade Thursday, and the Swiss franc which firmed to its strongest since late 2021 on Thursday.

Against a basket of currencies, the U.S. dollar index fell over 1 percent to a fresh nine-month low of 100.80 on Wednesday, and traded just above that on Thursday.

Friday’s U.S. nonfarm payrolls report will be the next test of the Fed’s fight against inflation, though official statistics on Wednesday showed that job openings had unexpectedly risen in December, pointing to a still-tight labor market.