By Alun John

HONG KONG, (Reuters) – The euro is heading for its highest week since March 2020. It was at its near-three-month peak after the hawkish shift Thursday by the European Central Bank sparked speculation over the timing and pace of future rate increases.

The ECB held rates steady as was widely expected. However, the euro rose 0.26% and reached $1.468 in Asian trading Friday. This is in reaction to Christine Lagarde (ECB president) acknowledging mounting inflation risks.

For the week, the euro single currency gained 2.86%, the highest weekly gain it has seen since March 2020 during the initial stages of the pandemic. An increase of $1.1482, the level seen last on Jan.14th, would make euro’s strongest gain since mid November.

Lagarde made it possible for the ECB to begin a new tightening cycle this year. Rodrigo Catrill, a Senior FX Strategist at National Bank of Australia, said: “The market has been moving a little towards this but the fact that President has acknowledged it is a big deal.”

The ECB has been viewed as the central bank with the highest degree of dovishness.

Sterling reached $1.361 on Thursday, having increased to a 2-week high of $1.3626 after the BoE raised rates 25 basis points. Nearly 50% of its policymakers wanted an even larger rate increase to curb inflation.

The, which measures the greenback in comparison to six major peer currencies, fell 2% this week, its largest weekly drop since March 2020.

The sharp reverse is after the index gained 1.65% last week. This was due to traders changing positions in preparation for more rapid Federal Reserve rate rises. Five U.S. rate increases are being considered by the markets.

U.S. Non-farm Payroll data will be released later Friday. Although it’s expected that there is a significant slowdown in job growth in light of Omicron strain COVID-19 spreading in January, data won’t prove as important for the Fed in the future as they were in the past because the Fed is more concerned with inflation.

Catrill said, “We have been warning clients that there will be more volatility in FX and markets overall when central banks enter a new pricing cycle. That’s exactly what we’ve seen happen in the recent weeks in the dollar.”

“Markets wonder when and how much (central banks are) going to raise their rates, but they also start to wonder how fast and how high. The Fed isn’t the only story. It’s also a Bank of England and ECB story.

On Wednesday, the Governor of Reserve Bank of Australia said that a rate increase this year is possible. However, he argued that there were rare opportunities to achieve full employment and it was worth being patient.

That picture remained unchanged despite the RBA’s monetary policy announcement on Friday. The dollar is currently at $0.7151

As the benchmark Japanese 10-year and 5-year Japanese government bonds rose to 6-year highs, the yen stood at 114.88 dollars. Analysts began to speculate that the Bank of Japan may have to follow the lead of peers and tighten its monetary policy.