Euro slips from 2-week highs as mood turns sour
THE euro slipped from 2-week highs on Wednesday (Jul 20), as investors braced for a crucial European Central Bank (ECB) policy meeting on Thursday after policymakers floated the prospects of a 50-point interest rate hike.
The single currency has rallied more than 3 per cent in the last 4 trading sessions on expectations the European Central Bank could deliver a big 50-basis point rate hike and a Reuters report that a key Russian gas pipeline would reopen on time after maintenance.
But investors' mood turned sour on Wednesday with European stock markets in the red and US stock futures pointing to a rocky start and weighing on the single currency.
"Fears appear to be rising again about Russian gas supplies to Europe and the potential for a deep recession there, and this downbeat sentiment has seen safe haven assets in the ascendancy again," said Stuart Cole, chief macro economist at Equiti Capital in London.
On Wednesday the currency firmed as much as 0.5 per cent to US$1.02730, the highest since early June, before easing off those levels and weakening 0.4 per cent to US$1.0173.
Both events - the ECB meeting and the reopening of the Nord Stream 1 conduit after a 10-day shutdown - are due on Thursday, leaving markets on tenterhooks.
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The event risks lifted short-dated euro-US dollar implied volatility, a gauge of expected swings, to 14 per cent. It touched March 2020 highs above 14.6 per cent on Tuesday.
"A discussion regarding 50 bps is justified and it will all then depend on what ECB does vis-a-vis the (monetary policy) transmission protection mechanism and then on further rate hikes," said Peter Kinsella, global head of FX strategy at asset manager UBP.
He was referring to the ECB's plans for a so-called anti-fragmentation tool to shield Italy and other weak euro zone states from higher borrowing costs. The ECB is meant to detail these plans at its Thursday meeting.
On Nord Stream, Reuters reported supplies would restart on time, albeit at well below full capacity.
Against the basket of major currencies in the US dollar index, the greenback rose 0.2 per cent at 106.92.
Markets have pared expectations of a 100 bps US interest rate rise next week and now see a 23 per cent probability of such a move after policymakers poured cold water on it.
The Bank of Japan is expected to stick to its dovish stance at its Thursday meeting. That view held the yen at 138.10 yen per US dollar, not far off 24-year highs. REUTERS
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