Pressure is growing on the European Central Bank to raise interest rates as eurozone inflation hit a record 5.1% in January, topping estimates by the most in two decades. Until now, the ECB has lagged other central banks in responding to escalating price pressures, and has said it wouldn't increase its key interest rate until it ends its net bond purchases, meaning a "very unlikely" hike in 2022. "I don't think that something happening at the Fed is bound to happen" in Europe," ECB President Christine Lagarde said back in December, though financial markets are now showing a hike of 10 basis points anticipated for September.
Forex: Currency traders are meanwhile preparing for an exciting session today with meetings from both the ECB and the Bank of England. Any signs of a hawkishness from Lagarde could see the euro recover lost ground against the pound, though she may be more hesitant to do so, given that January's core inflation figure - which strips out volatile components like food and energy - actually eased to 2.3% from 2.6% in December. Contrast that to the U.S., which saw a core inflation figure of 5.5% last month, and an overall headline rate of 7%.
On the other side of the continent, the Bank of England is expected to deliver its first back-to-back interest rate hike since 2004, increasing its benchmark lending rate by 25 bps to 0.5%. If that were to happen, sterling could advance against the euro, approaching some of the strongest levels seen since Brexit. The BOE is also likely to take initial steps toward unwinding some of its £895B stimulus program and investors will be on the lookout for comments from Governor Andrew Bailey.
Over in the U.S.: The greenback is taking a breather from a recent three-day slide, finding some footing as a tech slump didn't leave much appetite for riskier currencies. "The bigger challenge to the dollar has come from overseas, particularly in Europe," according to analysts at ING. "Stubbornly high inflation here is prompting a re-assessment of the amount of patience the likes of the ECB can show. And the re-pricing of the ECB cycle is providing support to European currencies in general."