Euro Steadies Near 2-month Low as Inflation Drops in Relief for ECB

Euro Steadies Near 2-month Low as Inflation Drops in Relief for ECB
U.S. Dollar and Euro banknotes are seen in this illustration taken on July 17, 2022. (Dado Ruvic/Illustration/Reuters)

LONDON—The euro steadied on Thursday near a two-month low after data showed eurozone inflation eased more than expected last month, backing arguments for only cautious further rate hikes by the European Central Bank (ECB).

Inflation in the 20 nations sharing the euro eased to 6.1 percent in May from 7.0 percent in April, below expectations for 6.3 percent in a Reuters poll of economists.

The euro flattened at $1.0690, towards a two-month low of $1.0635 touched on Wednesday, as the ECB could be under less pressure to extend its monetary tightening much further with inflation showing signs of subsiding.

The ECB has raised base rates by a combined 375 basis points to 3.25 percent over the past year to combat runaway prices.

Money markets are pricing in an 85 percent chance of a 25 bps hike by the ECB when it meets on June 15.

Commerzbank said with inflation easing, the market is no longer certain whether there will be two 25 bps rate steps. “That makes life difficult for the euro at present,” said Antje Praefcke, FX Analyst at Commerzbank.

ECB Vice-President Luis de Guindos said on Thursday that the central bank has already gone through most of its monetary policy tightening though the cycle is not quite over yet.

Dollar King

The dollar rose after a vote of approval from the U.S. House of Representatives to suspend the debt ceiling, though the greenback drifted from a two-month high as investors trimmed bets the Federal Reserve will raise interest rates this month.

The divided U.S. house on Wednesday passed a bill to suspend the $31.4 trillion debt ceiling, and the focus now turns to how it will fare in the Democratic-led Senate just days before the federal government is expected to run out of money to pay its bills.

“Our view is that ... the U.S. government will avoid a default that could potentially derail the U.S. and also the global economy,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia.

“I think the dollar can gain a little bit more support on a successful vote today.”

The dollar index, which measures the currency against a basket of six peers rose 0.13 percent to 104.28, and was off a two-month high of 104.7 touched on Wednesday as traders pared back their expectations of another Fed rate hike this month.

Fed officials, including the vice chair-designate, pointed towards a rate hike “skip” in June, giving time for the U.S. central bank to assess the impact of its tightening cycle thus far against still-strong inflation data.

Markets are now pricing in a roughly 37 percent chance that the Fed will raise rates by 25 basis points at its upcoming meeting, as compared to a near 67 percent chance a day ago, according to the CME FedWatch tool.

The Japanese yen fell 0.4 percent to 139.87 per dollar.

Japan’s financial authorities met earlier this week in the wake of the yen’s slide to a six-month low against the dollar. The country’s top diplomat said that Japan will closely watch currency moves and won’t rule out any options.

The Chinese offshore yuan last bought 7.1282 per dollar, after touching a six-month low in early London trading.

It had briefly gained some support after a private business survey on Thursday showed China’s factory activity unexpectedly swung to growth in May from a decline in April.

The yuan had fallen nearly 3 percent against the dollar in both the onshore and offshore markets in May, as China’s post-COVID-19 economic recovery struggles to gain steam.

By Joice Alves and Rae Wee