Euro surges after inflation hits new record high

London

THE euro rose for a third consecutive day on Wednesday (Feb 2), coming off a 20-month low last week, as eurozone inflation rose to a new record last month, fuelling bets the European Central Bank (ECB) might raise interest rates sooner than expected.

At 5.1 per cent in January, price growth is more than twice the ECB's 2 per cent target.

The euro has slipped almost 8 per cent in 3 months, dented by expectations that the ECB would be the last major central bank to raise interest rates after it shrugged off inflation for months and argued that temporary factors were behind the rise.

The euro strengthened by 0.3 per cent versus the US dollar to US$1.13050 after the data was released, as investors assessed the chances that the ECB might signal a faster path for policy tightening at its meeting on Thursday.

Ulrich Leuchtmann, head of foreign exchange at Commerzbank, said the money market was now pricing in an ECB rate increase for the last quarter of the year.

In the short term, the impact on the euro will depend on what ECB president Christine Lagarde has to say tomorrow, he said.

"Some market participants will expect that the ECB will have to sound hawkish tomorrow," Leuchtmann added.

In the meantime, the US dollar retreated from a 19-month high reached last week, as US Federal Reserve officials cautioned against potentially aggressive rate increases this year.

A chorus of Fed officials said they would raise interest rates in March but spoke cautiously about what might follow, indicating a desire to keep options open given the uncertain inflation outlook.

Against a basket of currencies, the dollar fell for a third day, slipping 0.25 per cent to 96.015, with a rally in global equity markets undoing some of its safe-haven allure.

Sterling rose to a nine-day high against the dollar, up 0.1 per cent at US$1.3542 ahead of a Bank of England (BoE) policy meeting on Thursday.

Investors have fully priced in an expected increase in the BoE base rate by 25 basis points to 0.5 per cent on Thursday. REUTERS