The euro edged up on Wednesday but was off Friday’s three-week high, as traders looked for clues as to when the European Central Bank will hike interest rates.
The dollar was little changed, a day before the release of U.S. consumer price data that may offer new indications about the pace of the Federal Reserve’s monetary tightening.
Investors have been revising their forecasts for ECB rate hikes after the bank caught them off guard last week, with President Christine Lagarde flagging for the first time that monetary tightening was a possibility.
Seeking to temper investors’ growing expectations for aggressive action, Lagarde then said on Monday there was no need for extensive tightening.
However, Bundesbank President Joachim Nagel said in an interview to German newspaper Die Zeit on Wednesday that the ECB could raise interest rates this year as inflation was proving to be high for longer than expected.
“We are revising our ECB key rate forecast to reflect last week’s hawkish shift by ECB President Christine Lagarde,” said UniCredit’s Marco Valli, Global Head of Research and Luca Cazzulani, Co-Head of Strategy Research.
They now expect a 25 basis point rate hike in the last quarter of the year and one early in 2023, compared to none previously. That could give limited support to the euro, they said, as policy-rate bets remained in favour of the U.S. dollar.
Money markets are pricing in a 10 bps ECB rate hike in June and a 50 bps rate hike by December.
Markets are also pricing in a 75% chance of a 25 or 50 bps Fed hike in March, according to CME’s FedWatch Tool.
Economists polled by Reuters predicted that U.S. inflation data due on Thursday would show that consumer prices had climbed 7.3% year-on-year in January.
“We expect the (U.S. inflation) data to support expectations of the Fed being hawkish,” said Jens Nærvig Pedersen, FX and rates Strategy chief analyst at Danske Bank.
The euro edged up 0.2% to $1.1437 at 1210 GMT, after touching $1.1483 on Friday, its highest level since Jan. 14.
The dollar index, which gauges the greenback against six major peers including the euro, was down 0.16% at 95.435, after bouncing off a 2-1/2-week low of 95.136 reached Friday.