Euro, sterling dip as investors assess rate outlook

By Karen Brettell

NEW YORK (Reuters) – The euro dipped against the dollar on Thursday after the European Central Bank raised interest rates by a widely expected 50 basis points, while the Bank of England adopted a more dovish tone on inflation.

The ECB penciled in at least one more hike of the same magnitude next month and said it will then evaluate the subsequent path of its monetary policy.

The BoE also raised rates by 50 basis points and dropped its pledge to keep increasing them “forcefully” if needed and said inflation had probably peaked.

“The ECB was more or less in line with expectations and the Bank of England sounded a bit more dovish, so I think that’s helping to slow the dollar’s decline,” said Joe Manimbo, senior market analyst at Convera in Washington. “You get the sense that central bankers are taking a little bit of comfort from inflation moving in the right direction.”

The euro fell 0.70% on the day to $1.0913 and sterling dropped 1.09% to $1.2240, the lowest since Jan. 17.

The dollar gained 0.74% against a basket of currencies to 101.71.

Some of the commentary from the ECB was also interpreted as dovish, and it seems that “there is more of a global central bank pivot taking place,” said Mazen Issa, senior FX strategist at TD Securities in New York. “Central banks are in data dependent mode, but that means that they’re no longer in control and so markets are basically leading the central banks at the moment.”

The dollar index fell to a nine-month low of 100.80 on Wednesday after Federal Reserve Chair Jerome Powell was interpreted as taking a more dovish tone on future monetary policy.

The U.S. central bank said it had turned a key corner in the fight against high inflation, but that “victory” would still require its benchmark overnight interest rate to be increased further and remain elevated at least through 2023.

Markets reacted by adding to bets that the Fed will stop hiking after an additional 25 basis points increase that is expected in March, and then cut rates in the second half of the year.

“It certainly sounded like Powell flew the mission accomplished banner yesterday and sprinkled a lot of doubt on whether or not their December dot plot is still viable,” said Issa.

Fed officials in December forecast that they would hike rates above 5%, but traders are pricing for the benchmark rate to peak at 4.88% in June, and then fall to 4.40% by December.

Data on Thursday showed that the number of Americans filing new claims for unemployment benefits unexpectedly fell last week as the labor market remained resilient despite higher borrowing costs and mounting fears of a recession.

U.S. worker productivity also increased faster than expected in the fourth quarter, resulting in a moderation in labor costs’ growth.

This week’s major U.S. economic release will be Friday’s employment report for January, which is expected to show that employers added 185,000 jobs in the month.