The euro slipped against the dollar Tuesday, but could be set for a boost as pressure is building on the European Central Bank to take its most aggressive stance on rate hikes in its history as its battle against record inflation is set to get underway.
EUR/USD fell 0.39% to $1.0734.
The euro “might be able to benefit from higher inflation levels…as it has since become clear that the ECB…[is] willing to act,” Commerzbank said in a note.
“Now that it [ECB] has signaled its willingness to act even larger, 50bp rate steps do not seem impossible any longer,” Commerzbank added, following data showing eurozone inflation hit a record high again in May.
Raising rates by 50 basis points increments would mark a first for the ECB. The central bank hasn’t hiked rates since 2011, and has kept its benchmark rate in negative territory since 2014.
Eurozone inflation climbed to a record 8.1% in May from 7.4% the prior month, led by rising energy and food costs from the ongoing Russian-Ukrainian crisis.
The data arrived ahead of the European Central Bank’s meeting next week, when the central bank is widely expected to tee up the idea of beginning liftoff on rate hikes in July.
Ahead of the meeting, ECB speakers have been upping the ante on expectations for larger rate hikes.
“The data, in my view cement the necessity to take the first step in raising rates,” Kazimir told Reuters in an interview published Tuesday. “My baseline is for 25 basis points [in July] but I’m open to talk about 50 basis points.”
The mood from the more hawkish members of the ECB is in contrast to the central bank’s president Christine Lagarde’s, who has indicated that quarter-point increases are likely at meetings in July and September.