The euro edged higher on Monday as risk appetite picked up as investors awaited a European Central Bank (ECB) policy meeting later this week. European stocks also rose, helped by miners and luxury stocks as China further eased COVID-19 restrictions.
Markets, which have already priced in several ECB rate hikes and the end of the bond buying stimulus, want clarity on what comes next. Hedge funds are already stuffed with euros. Data from the US futures market shows that speculators hold their largest net long position in euros in 12 weeks.
“We expect the euro to be rangebound ahead of the ECB’s policy meeting,” said Roberto Mialich, forex strategist at Unicredit. “A hawkish surprise, namely (ECB President Christine) Lagarde opening the door to a 50 basis point rate hike in July, would support the common currency,” he added.
As of 11:21 GMT, it was 0.1% higher at $1.073. Morgan Stanley expects the ECB to finalize the exit from negative rates in September.
However, “given the uncertain growth outlook, we see the ECB shifting gears after September and have forecast the next rate hike at the projection meeting in December 2022 with a pause thereafter until September 2023”, Morgan Stanley analysts said in a research note. . Barclays sees the ECB deposit rate at 0.75% by the first quarter of 2023 and a break in the rise thereafter.
Money markets are pricing in 130 basis points (bps) of ECB rate hikes by the end of the year, including a 30% chance of an additional 25bps move beyond the 25bps fully assessed in July. “The main question is whether the (July rate) hike will be 25 or 50 basis points, and we expect Lagarde to leave all options on the table for the July meeting,” Enrique said. Diaz Alvarez, Chief Risk Officer at Ebury.
“Given current market expectations, this (Lagarde’s comments) should support the common currency as expectations for ECB hikes continue to be pushed higher across the curve,” he added. The U.S. dollar currency index, which tracks the dollar against the six major currencies, was down 0.1% to 102, not far from its lowest since April 25 at 101.29, hit on May 30. .
The dollar extended its gains on Friday after data showed a tight labor market that could keep the Federal Reserve going with rate hikes. Investors have been increasingly cautious about the dollar after it hit a decade high in mid-May.
But some believe that a cycle of monetary tightening coupled with an economic growth narrative could provide additional support for the US currency. China’s offshore yuan was around its one-month high against the dollar at 6.638, after recent positive signals for a national economy battered by COVID-19 restrictions.
Beijing will further ease COVID restrictions by allowing indoor dining as the capital steadily returns to normal with a drop in infections, state media said on Sunday. “We don’t expect the yuan to strengthen further in the near term, as we believe the central bank wants to keep the currency at low levels to support economic growth,” Mialich said.
The Japanese yen was hovering around multi-year lows against the dollar and the euro as analysts expected the Bank of Japan (BoJ) to stick to its ultra-low interest rate policy. Governor Haruhiko Kuroda said the BoJ’s top priority was supporting the economy, underscoring an unwavering commitment to maintaining “powerful” monetary stimulus.
The yen was at 130.61 just off its two-decade low of 131.35 against the dollar, and at 140.08 near its 7-year low of 140.36 against the euro.
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