The euro fell on Friday after economic data painted a mixed picture for growth and inflation across the euro zone, raising uncertainty around the size of the European Central Bank’s expected interest rate hike next week.
Preliminary data showed gross domestic product in the euro zone expanded by 0.1% in the first quarter, below expectations in a Reuters poll for 0.2%.
The euro zone’s two largest economies, Germany and France, stagnated or barely grew, while the Spanish and Italian economies expanded more than expected.
A flood of inflation data releases were also mixed.
“The euro is under pressure today as core inflation data out of France and Spain didn’t reach the burden of proof required to force the ECB into a 50bp hike next week,” said Simon Harvey, Head of FX Analysis at Monex Europe.
The euro fell 0.4% to $1.0985, but remained near its recent one-year high, buoyed by expectations that the ECB still has further to go in raising interest rates, analysts said.
But after the economic data, traders increased their bets that the ECB will hike by 25 bps, rather than 50, next week, according to Refinitiv data.
The International Monetary Fund called on the ECB on Friday to keep raising interest rates until the middle of 2024 to help bring down high inflation.
Versus the yen , the euro briefly rose to its highest level since December 2014 at 149.50. It was last up 1.2% at 149.35 yen after the BOJ left its ultra-easy monetary policy unchanged even as it scrapped a pledge to keep interest rates low.
YEN AT 9-YEAR LOW VS EURO
At Governor Kazuo Ueda’s first policy meeting, the BOJ said it would maintain ultra-low interest rates as expected, and unanimously decided to make no changes to its yield curve control (YCC) policy.
However, the central bank removed a pledge to keep interest rates at “current or lower levels” and said it would “conduct a broad-perspective review of monetary policy”.
The yen fell sharply also against the U.S. dollar, down 1.55% to 136.11, its lowest since March 10.
“The hopes of a policy change have been somewhat dampened by the review,” said Moh Siong Sim, a currency strategist at Bank of Singapore, adding that the likely length of the review might have cooled hopes for an imminent move in policy settings.
“For now, the outcome is read as dovish.”
USD SURGES
The U.S. dollar rose broadly, drawing support from data pointing to still-sticky inflation in the United States, which reinforced expectations for a 25-basis-point rate hike at next week’s FOMC meeting. .
The U.S. dollar index gained 0.59% to 102.02, to a one-week high and rebounding from a near two-week low struck on Wednesday.
Data released on Thursday showed that while U.S. economic growth slowed more than expected in the first quarter, consumer spending, which was accompanied by a rise in inflation, accelerated.
“The Fed is widely expected to hike again next week but with inflation remaining sticky, we expect the Fed to stay on hold for the remainder of the year, dashing hopes of a policy pivot in (the second half),” said analysts at Societe Generale.
