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Title: Dollar Edges Lower; Euro Above Parity Ahead of ECB Meeting

Jul 18, 2022 02:53AM ET

By: AnalysisWatch

The US dollar edged lower in early European trade on Monday, pulling away from multi-year highs, while the euro climbed away from parity ahead of the European Central Bank's weekly meeting.

At 02:55 AM ET (0655 GMT), the dollar index, which tracks the greenback against a basket of six other currencies, was trading 0.3 percent lower at 107.588, falling back from last week's two-decade high of 109.290.

The dollar index had risen last week to its highest level since September 2002 following the release of consumer price data on Wednesday that showed inflation rising at its fastest pace in four decades.

However, expectations of outsized tightening by the Federal Reserve were scaled back by at least 100 basis points at its meeting in late July. Fed Governor Christopher Waller and St Louis Fed President James Bullard, both known as hawks, argued for a 75 basis point hike this month, while the Michigan Institute's 5-year inflation expectations fell on Friday to 2.8% in July from 3.1% in June.

EUR/USD rose 0.2% to 1.0109, moving away from parity ahead of Thursday's European Central Bank meeting where policy makers are expected to start Europe's rate hike cycle with a 25 basis point increase.

President Sergio Mattarella declined to resign and called on the former ECB chief to address parliament next week, but if the widely respected leader sticks to his stance, the stability of the debt-ridden country and therefore the euro is at risk.

In addition, traders are watching to see if the Nord Stream pipeline from Russia to Germany will resume delivering gas on Thursday after a shutdown for planned maintenance, fearing Russia may want to extend the outage for political reasons.

"EUR/USD seems to be primarily driven by other factors (macroeconomic picture, Russian gas supplies, Fed prices), but history teaches us that political risks can lead to a significant increase in the risk premium for EUR/USD, so this is a threat that cannot be ignored," analysts at ING said in a note.

Elsewhere, USD/JPY fell 0.2 percent to 138.21 and USD/CNY fell 0.1 percent to 6.7488 as the Bank of Japan will meet on Thursday and the Chinese central bank on Wednesday.

GBP/USD rose 0.4% to 1.1900 after the second of three debates on Boris Johnson's succession as Britain's next prime minister.

The risk-sensitive AUD/USD rose 0.3% to 0.6812, while NZD/USD added 0.1% to 0.6166 after New Zealand's annual inflation rate rose to 7.3% from 6.9% in the first quarter, hitting a fresh 32-year high.

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