The euro edged higher on Monday as risk appetite picked up while investors awaited a European Central Bank (ECB) policy meeting later this week. European shares also rose, helped by miners and luxury stocks as China eased more COVID-19 restrictions. Markets, which have already priced in several ECB rate increases and the end of bond-buying stimulus, want more clarity on what comes after.
Hedge funds are already loaded up on euros. U.S. futures market data shows speculators are holding their most significant net-long euro position in 12 weeks.
"We expect the euro to be rangebound ahead of the ECB policy meeting," Roberto Mialich, forex strategist at Unicredit, said. "A hawkish surprise, namely (ECB president Christine) Lagarde opening the door to a 50 bp rate hike in July, would support the common currency," he added.
However, "given the uncertain growth outlook, we see the ECB changing gears after September and have pencilled-in 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 depo rate at 0.75% by the first quarter of 2023 and a pause in hiking thereafter.
Money markets are pricing in 130 basis points (bps) of ECB rate increases by year-end, including a 30% chance of an additional 25 bps move beyond the fully priced 25 bps in July.
"The main question is whether the (July's 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 Diaz Alvarez, chief risk officer at Ebury, said.
"Given current market expectations, this (Lagarde comments) should support the common currency as expectations for ECB hikes continue to be pushed upwards across the curve," he added. The U.S. Dollar Currency Index, which tracks the dollar against six major currencies, was 0.1% lower at 102, not far off its lowest since April 25 at 101.29, hit on May 30.
Investors are cautious with the Dollar
The dollar extended its gains on Friday after data showed a tight labour market that could keep the Federal Reserve going with rate rises.
Investors have been increasingly cautious about the dollar after it hit its highest in a decade in mid-May. But some reckon that a monetary tightening cycle coupled with an economic growth narrative might provide further support to the U.S. currency.
The Chinese offshore yuan was around its one-month high versus the dollar at 6.638, after recent positive signals for a domestic economy battered by COVID-19 restrictions.
Beijing will further relax COVID curbs by allowing indoor dining as the capital steadily returns to normal with infections falling, state media said on Sunday.
"We don't expect the yuan to strengthen further in the short term as we think the central bank wants to maintain the currency at low levels to support economic growth," Mialich said.
The Japanese yen was hovering around its multi-year lows against the dollar and the euro, with analysts expecting the Bank of Japan (BoJ) to stick to its super-low interest rate policy stance.
Governor Haruhiko Kuroda said the BoJ's top priority was to support the economy, stressing an unwavering commitment to maintaining a "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 close to its 7-year low of 140.36 versus the euro.
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