Dollar Weakens, Euro Gains Ahead of ECB Meeting

By Peter Nurse – The U.S. dollar weakened in early European trade Thursday, retreating from a two-year high as the rally in U.S. bond yields paused for breath, ahead of a highly-anticipated European Central Bank meeting.

At 3 AM ET (0700 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.3% lower at 99.595, falling back from Wednesday’s intraday peak of 100.52, its highest since May 2020.

The benchmark 10-year Treasury yield traded at 2.684% early Thursday, retreating from Tuesday’s high of 2.836% as weaker than expected U.S. core consumer inflation reined in some expectations of more aggressive Federal Reserve tightening to combat inflation later in the year.

USD/JPY fell 0.3% to 125.28, with the unloved yen receiving some respite from the falling yields, making a small recovery from a 20-year low hit overnight.

Still, most attention Thursday will be on the European Central Bank meeting later in the day, to see whether the policymakers feel the need to combat record inflation levels even in the face of a potential war-induced recession.

As it stands the ECB plans to end its emergency bond buying at some point in the third quarter, with interest rates going up “some time” after that.

“The central bank is widely expected to deliver a more hawkish message as the Eurozone now faces record-high inflation. A hawkish shift to the ECB policy outlook could be expressed in adjusting the monthly purchases to conclude the program by June to start hiking rates in the second half,” said independent financial expert Kevin Beckman. 

“In this scenario, EUR/USD could find some demand around long-term lows and witness a solid bounce, especially as the USD looks overbought.”

EUR/USD traded 0.3% higher at 1.0918, extending gains made in the previous session.

GBP/USD rose 0.2% to 1.3142, continuing to gain after climbing 0.9% on Wednesday, the biggest daily percentage gain since June 2021, after British consumer price inflation leapt to its highest level in three decades in March.

USD/CAD dropped 0.2% to 1.2543 the day after the Bank of Canada raised rates by 50 basis points, its largest hike in around 20 years, in order to combat inflation running at a three-decade high.

USD/TRY edged higher to 14.6000, with Turkey’s central bank expected to maintain its benchmark interest rate at 14% at Thursday’s policy-setting meeting despite inflation surging past 60%.

This would be the fourth meeting in a row that the central bank has decided against raising interest rates after, under pressure from President Recep Tayyip Erdogan, it halted a series of rate cuts at the end of last year.

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