EUR/USD Slips Back Towards 1.0200, ECB and Russia Gas Flows in Focus

Key Points

  • The DXY rose slightly on Wednesday but was unable to break back above 107.0 ahead of Thursday’s risk events.
  • EUR/USD fell back towards 1.0200 ahead of Thursday’s ECB policy announcement as the restart of Russian gas flows.
  • Sterling and the loonie both shrugged off CPI data.

The US Dollar Index (DXY), a trade-weighted basket of major USD pairs, edged higher on Tuesday and was able to press back above the 107.0 level. The index had previously tumbled back from multi-decade highs above 109.0 in the last few days. The rally in the safe-haven US dollar came despite upbeat macro sentiment and a rally in US equities.

Euro Slips Ahead of ECB Meeting, Potential Russia Gas Flow Restart

The euro slipped slightly against the US dollar on Wednesday amid profit-taking following its recent bounce from sub-1.0 levels last week. Euro traders are looking ahead to two key event risks on Thursday.

Firstly, the European Central Bank is set to announce its latest monetary policy decision. Markets are unsure whether the central bank will kick off its tightening cycle with a 25 or 50 bps rate hike after reports earlier this week surprised investors by hinting that the bigger option was on the table.

Traders also await the ECB’s unveiling of its “anti-fragmentation” tool, designed to prevent any blow-outs in Eurozone bond yield spreads between nations that might hamper monetary transmission. The other risk is whether Russia restarts gas shipments through the Nord Stream 1 pipeline after planned maintenance commences. Reports earlier this week suggested they would.

A larger rate hike and restarting of gas flows could offer support to the euro. EUR/USD might be in with a shot of retesting weekly highs in the 1.0270 area.

Pound Flat Despite Hot CPI Figures

The pound moved a little lower against the US dollar on Wednesday, with cable hovering just below the 1.20 level that it has struggled to break above in recent days. GBP failed to gain any ground despite data out in the European morning that showed UK consumer inflation hitting its highest annual rate since February 1982.

According to the UK Consumer Price Index, the headline rate of inflation rose to 9.4% in June from 9.1% in May, above expectations for a rise to 9.3%. Analysts said that taken in combination with Tuesday’s robust jobs figures, the data solidified the likelihood of a 50 bps rate hike from the BoE at its next meeting in August.

The BoE has hiked rates by 25 bps at its last five meetings. In a speech earlier in the day, the governor of the BoE Andrew Bailey refused to be drawn into confirming what the central bank will do next month. He said a 50 bps move was possible but not “locked in”.

Loonie Shrugs Off Mixed CPI Data

The Canadian dollar was broadly flat against the US dollar on Wednesday. Sellers kept it below 1.2900, while support in the form of the 50-Day Moving Average just above 1.2850 gave the price action a floor.

The loonie broadly shrugged off the latest Canadian Consumer Price Index figures for June, which were mixed. The headline rate of inflation was revealed to have risen on a YoY basis to 8.1% from 7.7% in May, less than the expected rise to 8.4%. MoM, headline prices were up 0.7% versus an expected 0.9% rise, after May’s 1.4% jump.

But Core inflation unexpectedly rose on a YoY basis to 6.2% from 6.1% in May versus an expected drop to 5.9%. However, the MoM pace of Core price gains was just 0.3%, down from 0.8% in May.

The BoC hiked interest rates by 100 bps at its last meeting and with inflationary pressures having worsened in June, is expected to implement further aggressive tightening measures at its next few meetings as it seeks to cool the hot Canadian economy.

Elsewhere in G10 FX

The Kiwi was on track to post modest gains against the buck on Wednesday while the Aussie was a tad in the red. Both had paired back from earlier session highs in the respective 0.6270 and 0.6930 areas. Both still carry solid short-term momentum following their recovery from multi-year lows hit last week, boosted by central bank tightening bets.

Specifically, back on Monday, New Zealand inflation came in significantly higher than expected in Q2 when it hit a new 32-year high of 7.3% YoY, prompting the market to start betting that the RBNZ hikes interest rates by 75 bps next month.

Meanwhile, RBA commentary in the minutes of its last meeting and from governor Philip Lowe this week signaled that the central bank is uncomfortable with interest rates still so far below the so-called neutral level of 2.5% given how hot the economy is. Some analysts are also calling for a 75 bps rate hike from the RBA at its next meeting.

Like most of its G10 peers, the yen was broadly flat against the buck, with USD/JPY trading just above 138.00. Traders are on standby for what is likely to be a resolutely dovish BoJ policy announcement during Thursday’s Asia Pacific session.