Euro gains on ECB rate hike view, Macron optimism

The euro rose to a more than one-week high on Thursday against the dollar after a spate of hawkish comments from European Central Bank officials raised bets that euro zone interest rates will rise soon.

Expectations that French President Emmanuel Macron would win his re-election bid on Sunday also supported the single European currency.

Joachim Nagel, president of Germany’s Bundesbank, joined a chorus of policymakers in saying the ECB could raise interest rates at the start of the third quarter.

Money markets, which had eased rate hike bets following last Thursday’s ECB meeting, were now pricing in a 20 basis point (bps) rise by July and over 70 bps of tightening by year-end.

That would take benchmark interest rates above zero for the first time since 2013.

“Further hawkish comments from ECB officials over the next few weeks that solidify the odds of three 25 basis-point hikes this year could support the euro toward a test of $1.10, but the overall economic and ECB/Fed monetary policy divergence backdrop continues to favor a weaker euro,” said Shaun Osborne, chief FX strategist, at Scotiabank in Toronto.

European political news was also supportive, with French President Emmanuel Macron clearing a major hurdle ahead of Sunday’s runoff election with a combative performance in a TV debate against far-right candidate Marine Le Pen.

With the deciding vote just four days away, some 59% of viewers found Macron to have been the most convincing in the debate, according to a snap poll for BFM TV, suggesting Macron’s 10-point lead in the polls was not under threat.

“There didn’t seem to be anything from the debate that should tip the scales of the election in either direction,” Deutsche Bank’s Jim Reid wrote.

In mid-morning trading, the euro rose to $1.093, its highest level since April 11. It was last up 0.2% at $1.0874.

Sterling also fell to a 10-day low against the strengthening euro, with investors staying focused on the respective future monetary policy paths of the Bank of England and other major central banks. The euro was last up 0.2% at 83.21 pence.

The euro’s rise was quite broad-based, with the currency chalking up gains versus the yen, Swiss franc and Norwegian crown.

However, Antje Praefcke, an analyst at Commerzbank, warned that the euro could face downward pressure should the U.S. Federal Reserve move quicker than expected in hiking interest rates.

Investors also await fresh policy updates from the big three of the central banking world: Bank of England Governor Andrew Bailey, ECB President Christine Lagarde, and Fed Chairman Jerome Powell, at an IMF panel later on Thursday.

The U.S. dollar index, which gauges the strength of the currency versus a basket of rivals, was down 0.1% at 100.25.

The Chinese yuan was a big loser in London trading, its offshore unit declining 0.4% to 6.469 yuan per dollar, its lowest since September.

The Chinese currency has been hit by a double whammy of slowing economic growth expectations and shrinking yield differentials between Chinese and U.S. government debt.