Euro strengthens as improved risk sentiment hits dollar

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LONDON, Feb 2 (Reuters) – The euro rose for a third consecutive day on Wednesday, after hitting a 20-month low last week, as markets awaited euro zone inflation data for clues on the European Central Bank’s next move.

The euro has been under pressure, slipping 8% in three months, amid expectations that the ECB will become the latest central bank to raise interest rates.

Ahead of European Union inflation data due at 1000 GMT and an ECB meeting on Thursday, the euro strengthened by 0.14% to $1.12865 at 0900 GMT.

Strong inflation figures in Germany this week left investors assessing the chances that the ECB might signal a faster than expected path for policy tightening.

Ulrich Leuchtmann, head of foreign exchange at Commerzbank, said the money market is now pricing in an ECB rate increase for the last quarter of the year and it is too soon to see that reflected in the euro.

In the short term it will depend on what ECB President Christine Lagarde has to say tomorrow, he said.

“If the euro zone CPI today is high, some market participants will expect that the ECB will have to sound hawkish tomorrow,” Leuchtmann added.

In the meantime, the dollar retreated after climbing to a 19-month high last week, with risk sentiment lifted as U.S. Federal Reserve officials pushed back against potentially aggressive rate increases this year.

A chorus of Fed officials said they would raise interest rates in March but spoke cautiously about what might follow and indicated a desire to keep options open given an uncertain inflation outlook.

Against a basket of currencies, the dollar fell for a third day, slipping 0.11% to 96.162, with a rally in global equity markets tarnishing some of its safe-haven allure.

Sterling rose to a nine-day high against the dollar, up 0.05% at $1.3533.

Investors have fully priced in an expected increase in the Bank of England base rate by 25 basis points to 0.5% on Thursday.

(Reporting by Joice Alves Editing by David Goodman)

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