By John McCrank and Julien Ponthus
NEW YORK (Reuters) – The euro retreated from its overnight gains on Thursday following the European Central Bank’s announcement it will phase out its stimulus in the third quarter, while the dollar strengthened after a strong U.S. inflation report.
The statement from the ECB, which left the door open to an interest rate hike before the end of 2022, initially sent the euro higher, but the rally faded.
“From the ECB, we got what we expected, an acknowledgement that the Russia-Ukraine situation is creating a significant degree of uncertainty, but the base case is still to remove the excess accommodation that has been built up over the past several years,” said Bipan Rai, North American head of FX strategy at CIBC Capital Markets.
“In terms of FX, it feels like we priced a lot of this in going into the meeting,” he added.
At 10 a.m. Eastern time, the euro was down 0.57% at $1.1013, having jumped 1.6% on Wednesday, its best day in nearly six years.
The euro touched a 22-month low of $1.0804 earlier in the week, with investors expecting the crisis in Ukraine to have a sizeable impact on European growth. The single currency is widely seen as a gauge of Europe’s biggest security crisis since 1945.
Recent speculation that EU leaders were considering joint bond issuance to finance energy and defence spending have, however, supported the euro. An EU summit will begin later on Thursday in Versailles, west of Paris.
The ECB is trailing other major central banks such as the U.S. Federal Reserve and the Bank of England in the post-pandemic tightening cycle, which has also weighed on the single currency.
The U.S. Federal Reserve is expected to raise rates by at least 25 basis points when it meets next week.
“Our base case scenario is still for the Fed to be the most hawkish central bank in the developed world and that should support the dollar at the margin,” said CIBC’s Rai.
U.S. consumer prices surged 7.9% year-over-year in February, culminating in the largest annual increase in 40 years, data showed.
Inflation is poised to accelerate further in the months ahead as Russia’s war against Ukraine drives up the costs of crude oil and other commodities.
The dollar index was up 0.406% at 98.368 following the inflation report, after falling 1.17% on Wednesday.
Bitcoin tumbled nearly 6.52% to $39,225, 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.
(Reporting by John McCrank in New York and Julien Ponthus in London; Editing by Sam Holmes, Richard Pullin, Emelia Sithole-Matarise, Alex Richardson and Jonathan Oatis)