Euro retreats on ECB’s announcement to phase out stimulus

The statement from the ECB briefly sent the euro higher, before market sentiment turned negative

The euro retreated from its overnight gains on Thursday following the European Central Bank's announcement it will phase out its stimulus in the third quarter, while the dollar strengthened after a strong U.S. inflation report.

The statement from the ECB, which left the door open to an interest rate hike before the end of 2022 as soaring inflation outweighs concerns about the fallout from Russia's invasion of Ukraine, briefly sent the euro higher, before market sentiment turned negative.

The euro got a double whammy, from what is still a relatively dovish ECB - lower growth obviously - and with the higher inflation the market is really starting to price in a rate differential between the dollar and the euro, said Boris Schlossberg, managing director of FX strategy at BK Asset Management.

The ECB is trailing other major central banks such as the U.S. Federal Reserve and the Bank of England in the post-pandemic tightening cycle, which has also weighed on the single currency.

The euro touched a 22-month low of $1.0804 earlier in the week, with investors expecting the crisis in Ukraine to have a sizeable impact on European growth.

Recent speculation that EU leaders were considering joint bond issuance to finance energy and defence spending have, however, given the euro some support.

At 8:00 pm GMT, the euro was down 0.83% at $1.0985, after having jumped 1.6% on Wednesday, its best day in nearly six years.

The Fed is expected to raise rates by at least 25 basis points when it meets next week.

Our base case scenario is still for the Fed to be the most hawkish central bank in the developed world and that should support the dollar at the margin, said Bipan Rai, North American head of FX strategy at CIBC Capital Markets.

The dollar index was up 0.547% at 98.506, after falling 1.17% on Wednesday.