Euro boosted by ECB rate hike bets, Macron’s debate

By Saikat Chatterjee and Julien Ponthus

LONDON (Reuters) – A series of hawkish comments amplified bets that the European Central Bank would soon hike interest rates, lifting the euro to a one-week high on Thursday amid expectations French President Emmanuel Macron would win his reelection bid on Sunday.

Joachim Nagel, president of Germany’s Bundesbank, joined fellow policymakers in saying the ECB could raise interest rates at the start of the third quarter..

Money markets, which had eased rate hike bets following last Thursday’s ECB meeting, were now pricing in a 20 basis point (bps) rise by July and over 70 bps of tightening by year-end.

That would take benchmark interest rates above zero for the first time since 2013.

“The euro is all about the ECB drumbeat for a July hike,” said Kenneth Broux, an FX strategist at Societe Generale in London.

European political news was also supportive, with French President Emmanuel Macron clearing a major hurdle ahead of Sunday’s runoff election with a combative performance in a TV debate against far-right candidate Marine Le Pen.

With the deciding vote just four days away, some 59% of viewers found Macron to have been the most convincing in the debate, according to a snap poll for BFM TV, suggesting Macron’s 10-point lead in the polls was not under threat.

“There didn’t seem to be anything from the debate that should tip the scales of the election in either direction”, Deutsche Bank’s Jim Reid wrote.

In European morning trading, the euro rose as much as 0.7% against the U.S. dollar to $1.0936, its highest level since April 11.

Sterling also fell to a 10-day low against the strengthening euro, with investors staying focused on the respective future monetary policy paths of the Bank of England and other major central banks.

The euro’s rise was quite broad-based, with the currency chalking up gains versus the yen, Swiss franc and Norwegian crown.

However, Antje Praefcke, an analyst at Commerzbank, warned that the euro could face downward pressure should the U.S. Federal Reserve move quicker than expected in hiking interest rates.

“There is still a risk that the euro will nosedive again”, she wrote in a note.

Investors were eager for a fresh policy update by the big three of the central banking world: Bank of England Governor Andrew Bailey, ECB President Christine Lagarde and Fed chairman Jerome Powell, at an IMF panel later on Thursday.

The U.S. dollar index, which gauges the strength of the currency versus a basket of rivals, was down 0.4% at 99.94.

The Chinese yuan was a big loser in London trading, its offshore unit declining nearly half a percent to 6.47 yuan per dollar, its lowest level since September.

The Chinese currency has been hit by a double whammy of slowing economic growth expectations and shrinking yield differentials between Chinese and U.S. government debt.

(Reporting by Saikat Chatterjee and Julien Ponthus; Editing by Bradley Perrett and Kim Coghill)