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FOREX-Euro jumps on unscheduled ECB meeting, dollar dominates ahead of Fed

By on June 15, 2022 0

By Alun John

HONG KONG, June 15 (Reuters) – The euro surged after the ECB’s governing council said it would hold an emergency meeting on Wednesday to discuss the recent selloff in government bond markets, briefly distracting traders ahead of a well-attended Fed meeting.

The common European currency rose 0.55% against the dollar to $1.0475, following news of the meeting, which comes after the spread between Germany’s yields and the countries in the most indebted south, particularly Italy, reached its highest level in more than two years. .

“My hunch is that it has to do with the explosion in European peripheral spreads this week, which the ECB talked about after the board meeting last week without giving any commitment,” said Ray Attrill, head of FX strategy at NAB. .

“It has weighed on the euro somewhat this week, but I suspect the Fed could easily blow away any support the euro is attracting.

The Federal Reserve’s policy meeting is set to wrap up later on Wednesday, and markets are pricing in an outsized 75 basis point interest rate hike as policymakers try to rein in runaway inflation.

The higher euro meant the dollar index, which measures the greenback against major peers, edged down 0.3% to 105.09.

The pound was little changed at $1.2010 after falling to a 15-month low against the dollar at $1.1934 the day before, not helped by the possibility of another EU independence referendum. Scotland.

Market prices point to a 95% chance of a 75 basis point rate hike at the Fed meeting, according to the CME’s Fedwatch tool, up from just 3.9% a week ago, but down a fraction from over 99% earlier in the day.

The sharp rise in expectations followed media reports, first by the Wall Street Journal, that a bigger rate hike was expected after data released last week showed the consumer price index US had jumped 8.6% in the 12 months to May, the largest year. annual increase in four decades.

The US dollar had already gained ground in recent months thanks to the Fed’s rate hike ahead of most other major central banks and has been given another head start in recent weeks as investors seek safe havens. fearing the economic impact of the rapid tightening of financial conditions. .

But with such a large increase in interest rates already expected, the dollar may struggle to appreciate after the Fed’s decision.

“Given the current aggressive market pricing, there is a risk that the (Federal Open Market Committee) will be deemed ‘not hawkish enough’, pushing US interest rates and the USD down slightly after the meeting,” ABC analysts said in a morning note.

“In our view, it will take more than a 75bps hike tomorrow, or a flick of a 100bps hike for the July FOMC meeting, to push the USD significantly higher after the FOMC meeting.”

Rising US rates against Japanese yields at record lows weighed on the yen, which hit a fresh 24-year low of 135.58 to the dollar in early trading.

It rallied during the Asian day amid volatility in government bond markets, as high as 134.65.

Higher rate expectations have also hurt risk-friendly assets such as tech stocks, while in currency markets the Australian dollar, often seen as a gauge of risk appetite, sits at 0, $6,898, up 0.43% on Wednesday from the day before. low month.

The Aussie is down 7.9% so far this quarter, which would be its worst quarter since the first three months of 2020 when the COVID-19 pandemic hit.

The New Zealand dollar was at $0.6221, just off its two-year low of $0.6197 hit overnight.

Bitcoin, another risk-friendly asset class, fell 4% to $21,200. It hit an 18-month low of $20,800 on Tuesday, also hit by major crypto lender Celsius Network’s withdrawal freeze earlier this week.

(Reporting by Alun John Editing by Shri Navaratnam, Raju Gopalakrishnan and Louise Heavens)