On Monday, the euro moved higher, as there was a boost in risk appetite with investors keeping their eye on a policy meeting of the European Central Bank (ECB) that will take place this week on Thursday. Thanks to luxury and miner stocks, there was also a gain in European shares, with China easing more COVID-19 curbs. A number of rate increases from the ECB have already been priced in by the markets and they also expect the bond-buying program to come to an end. But, they want more clarity on what to expect down the road. Hedge funds have already moved on the euros.
The data from the US futures market shows that speculators have decided to hold onto their long euro position seen in the last 12 weeks. Forex strategists stated that they were expecting the euro to remain rangebound till the ECB meeting on Thursday. They also said that the common currency would get some support if there was a hawkish stance in store. This would be possible if Christine Lagarde, the President of the ECB, were to announce a rate hike of 50-basis points in July. The euro had climbed 0.1% at 1121 GMT to trade at $1.073.
According to Morgan Stanley, they expect that negative rates by the ECB would end in September this year. But, their analysts said that the uncertain growth trajectory could see the central bank change its stance after September. The next rate hike could happen in the December meeting and would then hit a pause until next year in September. Others have predicted that there could an increase of 0.75% in the depo rate in the first quarter of 2023 and then a slowdown. An interest rate hike of about 130 basis points by the ECB has been priced in by money markets.
They expect this to happen by the end of the year. Moreover, there is also a 30% chance that the ECB may decide to hike up the interest rate by 50 basis points instead of 25 in July. The primary question is whether the rate hike in July will be 25 basis points or 50 basis points. With euro zone inflation numbers turning out to be higher than expected last week, there is a greater possibility of the ECB opting for a 50 basis points increase.
There was also a 0.1% decline in the US Dollar Currency Index, which measures the greenback against a basket of other major currencies. It was trading at 102, which was close to its lowest value of 101.29 that it had reached on May 30th. On Friday, the US dollar managed to extend its gains, after labor market data indicated that the Fed was likely to continue tightening its monetary policy. Mid-May, the dollar had reached its highest value in over a decade and that has made investors very cautious. Some experts have reckoned that the US currency could strengthen further because of a positive growth narrative and continued rate hikes by the Fed.