(Bloomberg) -- Traders brought forward bets on the timing of European Central Bank interest-rate hikes after data showed inflation in the euro area unexpectedly accelerated to a record.
Money markets now see the ECB kicking off rate hikes with a 10-basis-point increase by July, compared with September previously. Consumer prices rose an annual 5.1% in January, beating expectations and raising pressure on policy makers who meet on Thursday.
While markets continue to wager on a quarter-percentage point of hikes by year-end -- which would lift the deposit rate to minus 0.25% -- the latest repricing shows traders are growing eager for a tightening cycle to start. That runs against the messaging from the ECB, which has signalled it wants to keep policy loose for longer to foster an economic recovery.
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“The inflation numbers should give her sleepless nights!” said Christoph Rieger, head of fixed-rate strategy at Commerzbank AG. referring to monetary decision to be made by President Christine Lagarde and her colleagues. “A 5% inflation rate at the end of the year is quite unlikely but nevertheless a tail risk that the market has to price where the ECB will probably have to hike by more than 25bps before year-end.”
Euro-Zone Inflation Unexpectedly Hits Record, Pressuring ECB
The euro extended gains to as high as $1.1328, set for the longest rising streak in almost six weeks. Meanwhile, German two-year borrowing costs climbed for a seventh day -- the longest advance since September 2017 -- to minus 0.45%, the highest in almost six years.
Yields on five-year debt also rose, outpacing their longer-term peers and narrowing the gap with 30-year rates to the least since the start of the pandemic.
“The euro has jumped above $1.13 and could remain bid into the decision,” said Roberto Cobo Garcia, head of G-10 currency strategy at BBVA. “Given that investors are starting to price in a tighter monetary policy context in the European Economic and Monetary Union, the euro downside potential should be limited.”
Traders also brought forward bets for Bank of England tightening, fully pricing a 25-basis-point hike on Thursday.
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