The European Central Bank raised its key interest rate by a quarter-point yesterday, taking the level to a three-year high of 2.5 per cent, and left the door open for further increases.
The move, which came hours after Germany unveiled strong rises in retail sales and machinery orders, had been universally expected in financial markets.
Jean-Claude Trichet, its president, did little to downplay expectations of further rises, saying it was "very much in the same mood" as it had been in December when it last raised rates.
His comments increased speculation that the bank was likely to raise rates by a quarter-point every quarter, which would put it on track for a June increase.
Jonathan Loynes, at Capital Economics, said: "There were plenty of hints it expects to raise rates again before long. We expect it to pick up the pace of monetary tightening over the coming months and we expect rates to get to 3.5 per cent."
The euro broke through the $1.20 barrier against the dollar as traders bet its refinancing rate could rise to 3 per cent or higher. The pound suffered its biggest one-day drop in three months, falling 0.5p to 68.61p.
The moves come amid a turnaround in confidence across the 12-nation zone and signs that Germany in particular is poised for a consumer revival.
Ken Wattret, at BNP Paribas, said: "The trickle of stronger data is turning into a deluge. A rise by June is a racing certainty."Reuse content