LONDON/SINGAPORE—The euro fell on Friday after economic data painted a mixed picture for growth and inflation across the eurozone, 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 eurozone expanded by 0.1 percent in the first quarter, below expectations in a Reuters poll for 0.2 percent.
The eurozone’s two largest economies, Germany and France, stagnated or barely grew as a surge in exports was offset by a decline in domestic consumption by households and their governments. But the Spanish and Italian economies expanded more than expected, partly thanks to that same rebound in trade.
“A divergence, which doesn’t make the ECB’s task any easier,” said Carsten Brzeski, ING Global Head of Macro.
A flood of inflation data releases were also mixed.
The euro fell 0.4 percent to $1.0986, but remained near its recent one-year.
The common currency was eyeing a monthly gain of 1.3 percent 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.
Market are pricing in a roughly 80 percent chance of a 25 bps hike, up from around 70 percent earlier in the day, according to Refinitiv data.
The International Monetary Fund called on the ECB on Friday to keep raising interest rates until the middle of 2024 and on European Union finance ministers to tighten fiscal policy to help bring down high inflation.
Yen at 9-year Low Versus 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 percent 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.
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 percent 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.
