FOREX-Euro wobbles as ECB ups its game against surging inflation

The euro edged down on Thursday after the European Central Bank said it would phase out its stimulus package in the third quarter and left the door open to an interest rate hike before the end of 2022 to keep surging inflation in check. Speaking at a news conference, ECB President Christine Lagarde warned that inflation risks had grown further after Russia's invasion of Ukraine and that the euro zone's Harmonised Index of Consumer Prices was now seen rising at 5.1% in 2022, a steep increase from the 3.2% expected in December.

The euro edged down on Thursday after the European Central Bank said it would phase out its stimulus package in the third quarter and left the door open to an interest rate hike before the end of 2022 to keep surging inflation in check.

Speaking at a news conference, ECB President Christine Lagarde warned that inflation risks had grown further after Russia's invasion of Ukraine and that the euro zone's Harmonised Index of Consumer Prices was now seen rising at 5.1% in 2022, a steep increase from the 3.2% expected in December. At 1408 GMT, the euro was trading at $1.1060, down 0.16% after jumping 1.6% on Wednesday, its best day in nearly six years.

The ECB's hawkish tone and its acknowledgement that economic growth would suffer substantially from the conflict in Ukraine while fuelling inflation at the same time sent the yields of euro zone government bonds sharply higher. Investors scrambled to price in further monetary tightening with a total of 45 basis points now expected to be added to the bank's key interest rate by the end of the year.

"The market's take is that the ECB is now closer to ending QE (quantitative Easing) and thereby raising rates than it previously was", commented Gavin Friend, a senior market strategist at National Australia Bank. The common currency on Wednesday benefited from a risk-on shift in sentiment that lifted equity markets and bond yields and saw oil prices drop amid optimism about diplomatic efforts to resolve what the Kremlin refers to as a "special operation" to disarm Ukraine. The euro has been widely seen as a gauge of Europe's biggest security crisis since 1945 and touched a 22-month low of $1.0804 earlier in the week, with investors expecting a sizeable impact on European growth.

In the Unied States, a steep rise in consumer prices to 7.9% in February came as no surprise and left the dollar index little moved, up just 0.10%. While the Federal Reserve is widely expected to raise its benchmark overnight interest rate by a quarter of a percentage point next week, growing calls before the war for a larger half a percentage point rise have quietened.

The ECB was so far seen trailing other major central banks such as the Federal Reserve and the Bank of England in the post-pandemic tightening cycle, which has weighed on the euro. Recent speculation that EU leaders were considering joint bond issuance to finance energy and defence spending have, however, boosted the currency. An EU summit will begin later today in Versailles, west of Paris.

Bitcoin fell nearly 7%, erasing most of the gains it made the previous day after U.S. President Joe Biden's executive order requiring the government to prepare reports on the future of money calmed market fears about an immediate regulatory crackdown on cryptocurrencies.