Euro slips to 3-month low after ECB raises interest rates

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The euro fell to a three-month low on Thursday after the European Central Bank raised interest rates to a record high but hinted that the move may be its last in its campaign of monetary tightening. 

The euro lost 0.6 per cent against the dollar to trade at $1.0660 after ECB policymakers announced their decision to increase interest rates by a quarter of a percentage point, to an all-time high of 4 per cent, as expected by the majority of investors.

In government debt markets, yields on the policy-sensitive two-year German bonds were 0.02 percentage points lower at 3.15 per cent. Bond yields fall when prices rise.

In its statement published alongside the decision, the ECB said rates “have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target”.

Francesco Pesole, forex strategist at ING, said that language “essentially suggests that the ECB may have hit the peak of the tightening cycle”.

“Markets are reasonably giving more weight to the dovish hints for now, also given the data flow in the eurozone has been quite grim lately,” said Pesole.

Europe’s region-wide Stoxx Europe 600 rose 0.5 per cent, while in the US, Wall Street’s benchmark S&P 500 opened 0.5 per cent higher and the tech-focused Nasdaq Composite rose 0.4 per cent.

The ECB policy decision comes amid heightened investor anxiety over a looming economic downturn, with the European Commission having recently downgraded its growth forecast for the 27-country union to 0.8 per cent this year and 1.4 per cent in 2024. 

“Against the weaker growth backdrop, the ECB can probably pause at the next meeting and if the growth outlook continues to deteriorate, a pause could morph into a peak,” said Mike Bell, a strategist at JPMorgan Asset Management. 

The ECB has now raised borrowing costs for 10 consecutive policy meetings since July 2022 in a push to tackle high inflation. Annual price rises have since decelerated to 5.3 per cent as of August, with some way to go until inflation reaches the central bank’s 2 per cent target.

In recent days, investor and policymaker concerns over stubborn price pressures have grown as oil prices have climbed to a 10-month high on the announcement of supply cuts by some of the world’s biggest producers.

Brent crude, the international benchmark, rose 1.3 per cent to $93.1 a barrel on Thursday, and the US equivalent West Texas Intermediate advanced the same margin to $89.69.

Stocks that are more sensitive to oil prices led advances in Europe on Thursday, with the Stoxx Europe 600 Energy index up almost 2 per cent, while Stoxx Europe 600 Basic Resources advanced 3.9 per cent.

Rising crude prices translated to a higher than expected headline inflation reading in the US on Wednesday, but they failed to disrupt markets that continued to bet on the Federal Reserve keeping rates unchanged at its next policy meeting.

In Asia, Hong Kong’s Hang Seng index added 0.2 per cent, while China’s CSI 300 fell 0.1 per cent. Japan’s Topix advanced 1.1 per cent and South Korea’s Kospi gained 1.5 per cent.