Euro awaits ECB rate hike, dollar muted

[SINGAPORE] The euro held steady on Thursday (Jun 11) near the bottom of its recent range ahead of a European Central Bank meeting which is expected to raise rates for the first time in nearly three years, while markets more broadly kept a wary eye on developments in the Gulf.

The common European currency was steady on the day at US$1.1536. However, it remains nearer to its mid-March lows - close to US$1.14 - than its mid-April post-war high above US$1.18.

Lee Hardman, senior currency analyst at MUFG, said the euro’s decline back to the lower end of the range in which it has traded since the Middle East conflict started was a result of traders upping expectations of tighter Federal Reserve policy, catching up with changes in ECB expectations which moved earlier in the conflict.

An ECB rate hike on Thursday has long been markets’ expectation and that meant, Hardman said, the meeting’s main focus for market participants would be on the updated policy guidance “given that there is currently around a 50:50 probability attached to back-to-back hikes in June and July.”

“The euro could weaken modestly if (ECB) President (Christine) Lagarde does not signal that another hike is on the cards as soon as next month. It will be difficult to trigger a hawkish repricing with three rate hikes almost fully priced in for this year.”

The British pound and Japanese yen were also steady against the US dollar on Thursday, though moves were muted. The pound was at US$1.3364, while the yen was at 160.5 per dollar, still at levels at which traders are on edge about the possibility of official intervention from Tokyo.

The Bank of Japan meets next week and is also expected to hike rates, though Governor Kazuo Ueda has been hospitalised for medical treatment and will miss the June 15 to 16 policy meeting.

Traders also continued to watch headlines from the Gulf, where the US and Iran traded air attacks for a second straight day, with President Donald Trump vowing further strikes if Tehran does not immediately agree to a peace deal.

Also in the mix for investors was data from the previous day, showing the US Consumer Price Index increased 4.2 per cent in the 12 months through May, the largest gain since April 2023, though the so-called core CPI gained 0.2 per cent over the month after rising 0.4 per cent in April, bolstering hopes that the price pressures from the energy shock might be contained.

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Traders though have fully priced in a 25-basis-point hike by December, a sharp turn from expectations of two rate cuts this year before the Iran war erupted at the end of February.

Tani Fukui, senior director of global economic and market strategy for MetLife Investment Management, said the inflation print offered some relief, but was not sufficient to shift the market’s hiking bias.

The Fed is expected to hold rates steady in Kevin Warsh’s first meeting as Fed chair next week, with a strong majority of economists in a Reuters poll predicting that the US central bank will keep rates unchanged for the rest of 2026.

“It is important for Warsh to signal a firm commitment to tackling inflation otherwise the bond market may react negatively,” said MetLife’s Fukui.

“While he need not signal imminent hikes, he must demonstrate that inflation remains a clear priority.”

Elsewhere, the Swiss franc briefly softened to 0.8 francs per dollar, its weakest in two months. REUTERS