Euro leaps parity on ECB to 3-week high, US stock futures eye higher open

The euro rose back above parity to a three-week high against the dollar on Friday following a large rate hike and hawkish comments from the European Central Bank, while U.S. stock futures indicated a higher open on Wall Street.

The euro was plotting 1.2% gains for the week after the ECB raised rates by a record 75 basis points on Thursday and signalled further hikes to fight inflation, even as the bloc's economy eyed a winter recession.

Recession was not inevitable, but the risk of one had increased, European Economic Commissioner Paolo Gentiloni said on Friday.

Meanwhile, Federal Reserve Chair Jerome Powell said on Thursday the bank is "strongly committed" to controlling inflation but hopes it can do this without the "very high social costs" involved in past inflation fights.

"We have seen more hawkish comments out of central banks not only in the U.S. but globally - the Bank of England and the ECB," said Matthias Scheiber, global head of portfolio management for multi-asset solutions at Allspring.

"You can see it in short-term interest rates."

The euro rose 0.73% to $1.0065, slightly below earlier highs, but off two-decade lows of $0.9864 hit earlier this week.

Germany's two-year bond yield hit its highest since 2011 for a second day before trimming gains to trade flat at 1.316%.

"A further 75bp rate step is quite possible for the October (ECB) meeting, as inflation is likely to rise further for now," Commerzbank analysts said in a note.

The dollar fell 0.74% against a basket of major currencies, as its yield differentials narrowed. [FRX/]

The yield on two-year U.S. Treasury notes fell 2 bps to 3.4733%.

U.S. S&P 500 futures rose 0.8% and Nasdaq futures were up 1.1%, after Wall Street's main indexes posted modest gains overnight, following heavy selling earlier in the week.

Investors sold $14.5 billion in equities in the week to Wednesday and U.S. equity funds recorded their largest weekly outflow in 11 weeks, BofA said on Friday citing EPFR data.

FED WATCH

U.S. rate futures have priced in an 85% chance the Fed will hike by another 75 basis points at this month's meeting, which would increase the Fed funds rate to a 3.0%-3.25% range. That is up from a 77% probability a day ago.

The MSCI world stock index rose 0.7% to a 9-day high, heading for a 1.7% weekly gain.

European stocks climbed 1.5%, helped by bank stocks on the euro zone rate hike expectations, while Britain's FTSE 100 also rose 1.5%.

Sterling rose 0.8% against the dollar after Britain's new leader, Liz Truss, on Thursday announced a cap on soaring consumer energy bills for two years to cushion the economic shock of the war in Ukraine.

The death of Queen Elizabeth on Thursday has heightened an uncertain state of affairs in Britain after the pound hit a 35-year low on the dollar earlier this week. [GBP/]

"There's a strong chance that King Charles III will be the first British monarch to pay more than a pound for a dollar, or more than a pound for a euro, or both," Societe Generale strategist Kit Juckes said in a note.

The Bank of England postponed its September interest rate decision for a week, to Sept. 22, following Elizabeth's death.

ASIA GAINS

The dollar dropped 1.5% against the yen to 141.94, pulling back from recent 24-year highs.

The Japanese currency has been a victim of the dovish monetary stance from the Bank of Japan, in contrast with rate hikes elsewhere.

MSCI's broadest index of Asia-Pacific shares outside Japan jumped 1.5%, driven by a 2.7% rise in Hong Kong's Hang Seng index and a 1.4% advance in China's bluechips.

China's consumer and producer prices rose less than expected in August, data showed on Friday, fanning hopes for more stimulus from Beijing as the economy wobbles.

Japan's Nikkei gained 0.5%.

Oil prices rose as investors considered Russia's threat to halt oil and gas exports to some buyers. U.S. crude advanced 2% to $85.20 a barrel while Brent crude also jumped 2% to $90.97 per barrel. [O/R]

Spot gold climbed 1.13% to $1,727.50 per ounce, helped by the weaker dollar. [GOL/]

Bitcoin surged past the $20,000 barrier and was eyeing its best day in six weeks as the U.S. dollar fell.

 

(Additional reporting by Stella Qiu in Sydney; editing by Kenneth Maxwell, William Mallard Editing by Louise Heavens)