Euro extends recovery on European rates prospects

Euro rose in European trade for the second session against dollar away from recent two-month lows, amid prospects for additional European rate hikes.

Such prospects are based on bullish remarks by ECB officials following surprise increases by Reserve Bank of Australia, and Bank of Canada. 

EUR/USD rose 0.2% to 1.0717, with a session-low at 1.0692, after rising 0.1% on Wednesday, the second profit in three days away from two-month lows at 1.0635. 

European Remarks

European Central Bank President Christine Lagarde said ahead of European Parliament in Brussels that inflationary pressures in the euro zone remains strong, and future decisions on interest rates must be based on bringing inflation back to 2%. 

European Central Bank member Gabriel Makhlof said European interest rates are likely to be high for an extended duration before reaching its peak. 

Global Central Banks

Both the Reserve Bank of Australia and Bank of Canada raised interest rates by 25 basis points, which were unexpected moves.

European Rates

Such recent bullish remarks and sudden moves by global banks indicate a likely decision by the ECB to raise interest rates for a longer duration.

Markets are now fully pricing in a 0.25% rate hike at next week's meeting by the European Central Banks, and there's a likelihood for an additional 0.25% rate hike in July. 

Price Gap

The current gap in interest rates between Europe and the US stands at 150 basis points and could shrink to 125 basis points next week.