On Wednesday, the euro recorded a decline from a high of two weeks, as investors geared up for a crucial meeting on Thursday of the European Central Bank (ECB). Policymakers have floated the possibility of increasing the interest rate by 50 basis points in the meeting.
Mood changes
In the previous four trading sessions, there has been a 3% rally recorded in the euro’s price because of expectations that the European Central Bank (ECB) could deliver a bigger-than-expected rate hike of 50 basis points. Moreover, there had also been a report that the Russian gas pipeline, Nord Stream 1, which had been closed for maintenance, would also open as per schedule.
But, Wednesday saw a downward shift in the mood of investors, as the European stock markets entered the negative territory and stock futures in the US hinted about a rocky start. All of this took a toll on the single currency.
Market analysts said that fears of a shortage in European gas supplies were on the rise once more and this could result in an economic recession. Therefore, the decline in investor sentiment means that it is safe haven assets that are rising once more.
Euro’s movements
On Wednesday, the euro strengthened by 0.5% to reach a value of $1.02730, which is the highest level seen since early June. However, it eventually came down from those levels by 0.4% to reach $1.0173.
The markets are left on tenterhooks because both crucial moments are scheduled for Thursday. This refers to the meeting of the European Central Bank (ECB) to decide the interest rate hike and the reopening of the Russian gas pipeline. Due to the risks associated with these events, there was a rise in euro-dollar implied volatility, which is short-dated, to about 14%.
On Tuesday, it had reached 14.6%, which is close to the highs seen in March 2020. Market analysts said that a 50 basis points increase in the interest rate made sense. But, their dealing with the transmission protection mechanism was also relevant, as was their decision of future hikes in the interest rate.
The ECB is expected to share plans pertaining to its anti-fragmentation tool for shielding Italy and other weak economies in the eurozone from the rise in borrowing costs. As for gas supplies, the pipeline will reopen as per schedule, but not at full capacity.
Other factors
There was a 0.2% in the US dollar index against a basket of other major currencies, which took it to 106.92. The expectations of an interest rate hike of 100 basis points have come down and now markets only see a 23% probability of seeing such a move from the US Fed. This was after policymakers had shared that they preferred a 75 basis points increase.
Thursday will also see the Bank of Japan have its policy meeting, but they are expected to stick to its ultra-easy monetary policy and not shift from its dovish stance. This pushed up the Japanese yen against the US dollar to reach 138.10.
