Euro reaches 10-month high vs Dollar

02 Feb 2023

The Euro reached a 10-month high against the Dollar on Thursday ahead of a European Central Bank meeting for which markets forecast a 50-basis point hike.

This comes a day after the Federal Reserve slowed down its rate hiking pace to 25 basis points. 

The U.S. central bank said it had turned a corner in terms of its inflation battle, reinforcing market forecasts that the rate hiking cycle is near and rate cuts may be looming. 

The greenback dipped overnight after Fed Chair Jerome Powell stated that "the disinflationary process has started," yet he also indicated rates would continue rising and cuts were not on the cards, Reuters reports.

"It was very much a sort of relief ... that there was nothing there to really seriously challenge the market's prevailing view," according to Ray Attrill, head of FX strategy at National Australia Bank.

"(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," he added.

The Bank of England is also meeting on Thursday, with markets predicting a 50-basis point rise.

After rising 0.47% on Wednesday, the Sterling held steady at $1.236, whilst the Dollar fell against the Japanese Yen to a fortnight low of 128.07. 

In addition, the single currency hit $1.1034 in Thursday's Asian trading, the highest seen since 4th April, after a 1.2% rise on Wednesday. At the time of writing, the Euro stood at $1.100 as all eyes were on the European Central Bank 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, ING global head of markets.

"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," he continued.

Furthermore, the U.S. Dollar index – measuring the greenback against six peers – edged down 1% to a new nine-month low of 100.80 on Wednesday and was just above this mark on Thursday.