Euro Climbs Most in Six Months on Hawkish ECB Speak

(Bloomberg) — The euro surged the most in six months against the dollar after a European Central Bank policy maker said further interest-rate hikes will be needed to curb inflation and as buoyant risk appetite curbed demand for dollars.

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The common currency rose as much as 1.6% against the greenback on Monday, the most since March. Bundesbank President Joachim Nagel said the central bank must take further clear steps if the inflation picture stays the same. The ECB raised its key rate by an unprecedented 75 basis points last week, narrowing the interest-rate differential with the Federal Reserve.

The moves came amid broad-based weakness in the dollar, with Bloomberg’s gauge of the greenback’s strength falling to its weakest level in almost two weeks. The euro traded as strong as $1.0198. It also extended gains against the pound, rising at one point to its highest since February 2021 at 87.22 pence.

“We see the relief in equity prices and the recent broad dollar correction continue into the week, as markets eye short-term peak central bank hawkishness and positioning is relatively defensive,” wrote Citigroup strategists in a note to clients.

Monday’s move caught traders off guard, triggering stop losses and compounding the common currency’s advance, according to two Europe-based traders. The market has been resolutely bearish on the euro’s outlook as Russia continues to curb gas supplies to the region, stoking inflation and raising the prospect of a recession.

Traders will be anticipating another bout of potential hawkish ECB chatter on Monday, with ECB Executive Board member Isabel Schnabel set to speak. Markets also have a eye on US inflation data for August due Tuesday, which is expected to show a slowdown in price growth, according to a Bloomberg survey of economists. That could further undermine the dollar’s gains by reducing the need for aggressive rate hikes.

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It “seems quite universal from clients to expect US CPI to slowdown and that we’ve seen the peak,” said Jordan Rochester, a currency strategist at Nomura International Plc. “The question now is how slow does it fall as most indicators suggest a sharp drop in US inflation pressures.”

(Corrects size and scope of euro’s increase in the headline and lede.)

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