Euro edges higher as risk appetite picks up, focus on ECB meeting

By Stefano Rebaudo

(Reuters) – The euro edged higher on Monday as risk appetite picked up while investors awaited a European Central Bank (ECB) policy meeting later this week.

Asian shares joined U.S. stock futures in making cautious gains ahead of U.S. inflation data this week.

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.

The common currency was 0.2% higher versus the greenback at $1.074.

It has recently appreciated against the dollar after government bond yields spiked on expectations of tighter monetary policy.

But according to some analysts, the euro has still room to grow as forecasts about ECB policy moves are prone to hawkish upgrades.

“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 (on July’s ECB move), this (Lagarde comments) should support the common currency as expectations for ECB hikes continue to be pushed upwards across the curve,” he added.

Money markets are pricing in 130 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 U.S. Dollar Currency Index, which tracks the dollar against six major currencies, was 0.1% lower at 101.99, not far off its lowest since April 25 at 101.29, hit on May 30.

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 of them 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 6.657, 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.

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 130.73 just off its two-decade low of 131.35 against the dollar, and at 140.3 close to its 7-year low of 140.36 versus the euro.

The Australian dollar was steady at $0.7218 on Monday ahead of a central bank policy meeting this week, after gaining 0.67% last week.

Australia’s central bank will raise rates by a modest 25 basis points for a second straight meeting, a Reuters poll of economists found.

(Reporting by Stefano Rebaudo; Editing by Robert Birsel)