The euro rose against the pound and the US dollar after hawkish comments by European Central Bank (ECB) policymakers who have indicated that the ECB could raise interest rates as soon as July. The euro-pound exchange rate rallied to a near two-week high as a result of the comments.
ECB policymaker Martins Kazaks said on Wednesday that an ECB rate hike could be delivered as soon as July. Policymaker Pierre Wunsch told Bloomberg early Thursday that policy rates could rise this year and ECB Vice President Luis de Guindos added that he was expecting the QE to end in July to open the way for an interest-rate increase the same month.
Later, on Thursday, markets will focus on ECB President Christine Lagarde's speech which could also contribute to the euro’s strength. On the other hand, the British pound has struggled to gain any momentum. Investors will remain cautious, however, as concerns about the potential economic fallout from the war in Ukraine could deter traders from investing aggressively and limit any gains for the euro in the near term.
Various comments by ECB policymakers seem to be an attempt to prepare markets for an interest rate hike which in turn has raised European bond yields and supported the euro exchange rates.
On Thursday, ECB Governing Council member Pierre Wunsch said that the ECB could raise policy rates above zero before the end of the year: "Without any really bad news coming from that front (Ukraine), hiking by the end of this year to zero or slightly positive territory for me would be a no brainer.”
Comments by de Guindos have been taken more seriously as he is closer to the centre of the Governing Council, as analysts pointed out. de Guindos said that it was "crystal clear" that the ECB forecasts to be released in June will show higher inflation and lower growth expectations. But, the possibility of a recession and stagflation in the Eurozone was not likely and for this reason it was reasonable to consider tightening in monetary policy. He noted: "I see no reason why we should not discontinue our Asset Purchase Program in July... for the first-rate hike we will have to see our projections, the different scenarios.” He added: "From today’s perspective, July is possible and September, or later, is also possible. We will look at the data and only then decide."
Euro to remain supported
The ECB said earlier in March that it intended to end its quantitative easing in the third quarter, but this has moved sooner now. The earlier timing and higher number of rate hikes that are now being priced in for this year will be supportive of the euro.
The single currency had a difficult time recently as the ECB postponed any plans for interest rate hikes compared to other central banks who had moved to normalise interest rates. Even more recently, in its April policy update, the ECB struck a reserved and cautious tone and offered no indication for an imminent interest rate rise. The latest hawkish comments by Kazaks and de Guindos demonstrate a radical shift and perhaps reveal a change of thought at the central bank. Any further comments or similar developments could boost the euro further.
Traders will closely watch later today the appearances from the ECB President Christine Lagarde, FOMC Chairman Powell and Bank of England Governor Andrew Bailey who will speak at the IMF Spring meetings. Unless Lagarde disappoints markets by dismissing the idea of hiking the policy rate in early-Q3, the euro will remain supported.
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