FOREX-Euro holds near 2-week high, awaits clarity from ECB and Nordstream

(Updates throughout, line changes, deadline)

By Sujata Rao

LONDON, July 20 (Reuters) – The euro held near a two-week high against the dollar on Wednesday on expectations of a bigger-than-expected ECB interest rate hike this week. and a Reuters report that a key Russian gas pipeline would reopen on time after maintenance.

Both events – the European Central Bank (ECB) meeting and the reopening of the Nord Stream 1 conduit after a 10-day shutdown – are scheduled for Thursday, leaving markets on edge.

But the euro benefited from news that the ECB was considering raising interest rates by 50 basis points, after hitting 25 basis points earlier.

On Tuesday, the report, citing two sources, helped the euro post its biggest daily gain in a month. On Wednesday, the currency strengthened 0.5% to $1.02730, the highest since early June, before falling again.

It also rose 0.25% against the pound, to 85.4 pence.

“A 50 basis point discussion is warranted and then it will all depend on what the ECB does vis-à-vis the (monetary policy) transmission protection mechanism and then further rate hikes,” Peter said. Kinsella, global head of currency strategy at asset director UBP.

He was referring to ECB plans for a so-called anti-fragmentation tool to protect Italy and other weak eurozone states from higher borrowing costs. The ECB is expected to detail these plans at its meeting on Thursday.

On Nord Stream, Reuters said supplies would restart on time, but well below full capacity.

But the European Union will detail energy emergency plans later on Wednesday, heightening concerns that the eurozone economy is heading into a recession caused by an energy crisis.

Event risks pushed the short-term implied volatility of the euro-dollar, an indicator of expected fluctuations, to 14%. It hit March 2020 highs above 14.6% on Tuesday.

The possibility of a more hawkish ECB, along with aggressive policy tightening expectations from several other countries, is putting pressure on the dollar, which is now more than 2.5% below a high reached in 20 years last week.

Against the basket of major currencies in the dollar index, the greenback was stable on the day around 106.6.

Markets have cut expectations of a 100 basis point U.S. interest rate hike next week and now see a 23% chance of such a move after policymakers poured cold water on it .

Meanwhile, following the hawkish message from a policy meeting in July, Reserve Bank of Australia Governor Philip Lowe suggested interest rates could at least double from current levels. .

This sent the Aussie to a three-week high at $0.6927.

China, however, resisted the central bank’s hawkish image, keeping benchmark lending rates stable. That pushed the offshore yuan 0.2% to 6.76 to the dollar.

As for the euro, many are warning that a 50 basis point rate hike may not support it much more, noting moves of 75 basis points and even 100 basis points in other developed economies.

“A 50 basis point hike doesn’t look so hawkish in comparison anymore, and we’ve seen the likes of the New Zealand dollar and the Swedish krona struggle after the (central banks) both went up 50 basis points in recent meetings,” HSBC strategist Dominic Bunning told clients.

UBP’s Kinsella said on a valuation basis the euro was cheap and the dollar expensive, implying room for recovery. But he noted an “ongoing waiting game with three big risks: gas shutdown, China’s zero COVID policy and whether the world can avoid economic recession.”

With these issues in balance, “the dollar will retain some risk premium,” he added.

The Bank of Japan is expected to stick to its dovish stance at its Thursday meeting. This view kept the yen at 138.2 to the dollar, not far from 24-year highs.

(Additional reporting by Rae Wee in Singapore and Alun John in Hong Kong; Editing by Bradley Perrett)

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