Euro falls against the US dollar after eurozone inflation data

THE euro fell against the US dollar on Thursday (Mar 2) after data showed inflation in the eurozone was not as high as investors had feared based on national readings in recent days.

Eurozone inflation eased to 8.5 per cent in February from 8.6 per cent a month earlier on lower energy prices, but still came in above a predicted 8.2 per cent in a Reuters poll of economists.

But market reaction to the data was muted after the euro rose 0.9 per cent against the US dollar on Wednesday, its biggest daily jump in a month, after prices in German rose more than hoped last month.

The hotter-than-expected German inflation in February came after unexpectedly strong readings in France and Spain, reinforcing the case for the European Central Bank (ECB) to keep raising interest rates.

“Inflation was clearly worse than forecast but maybe not as bad as feared given expectations had shifted following national data in the last few days,” said Ben Laidler, global markets strategist, Etoro in London.

“I think the base case is the ECB keeps on at a 50 basis point hike pace, which would still be pretty hawkish,” he added.

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The euro was 0.5 per cent lower against the US dollar at US$1.0618.

Investors now see the ECB’s 2.5 per cent deposit rate rising by a combined 100 basis points in March and May, then to around 4.1 per cent at the turn of the year. Markets have priced in an extra 50 basis points of hikes in just the past month.

Sterling was held back by remarks from Bank of England governor Andrew Bailey, who said “nothing is decided” on future rate increases which had traders trimming back bets on higher rates. Sterling was down 0.46 per cent to US$1.1970.

The US dollar index, which measures the US currency against six others, rose 0.43 per cent to 104.82, boosted by a rise in US Treasury yields and after Federal Reserve official Neel Kashkari left the door open to a 50-basis point rate hike at the Fed’s next meeting in March.

The yen fell 0.3 per cent to 136.65 to the US dollar, while the Australian and New Zealand dollars and the Chinese yuan moved lower after strong gains on Wednesday driven by Chinese manufacturing data showing factory activity in February grew at its fastest rate in a decade.

Investors are looking ahead to China’s National People’s Congress meeting, which begins on Sunday, for guidance on policy support for the post-Covid recovery.

“Yesterday’s positive surprise in the PMIs for China in February are a positive for mining commodity prices and the currencies of countries that export them,” said Commonwealth Bank of Australia’s head of international economics, Joe Capurso.

“The yuan and commodity currencies such as the Australian and New Zealand dollars can rise materially if the meeting sends a pro-growth signal, as we expect,” he said.

Bitcoin slipped 1 per cent to US$23,400 as trouble at crypto lender Silvergate weighed on the mood.

Besides European inflation, eurozone employment and central bank minutes are due later in the day, as are US jobless claims data. REUTERS