Jul 21, 2022 01:56AM ET
By: AnalysisWatch
The euro rallied Thursday, climbing back to a two-week high against the dollar as Russian gas began flowing through a key pipeline again, but investors were cautious ahead of an expected European Central Bank rate hike later in the day.
The euro gained 0.42% to $1.02215, reversing much of its sizable decline from Wednesday, when it touched $1.0273 intraday, its highest level since July 6.
The euro had rallied sharply three times this week as the ECB was expected to raise key interest rates sharply by 50 basis points and Reuters news agency reported that the Nord Stream 1 pipeline would be back on schedule and 40% operational after a 10-day maintenance period.
The operator of the link said gas flows had resumed, but it was not yet clear at what level, with the German grid regulator indicating 30% of capacity.
The European Union on Wednesday urged member states to curb gas consumption by 15% by March after President Vladimir Putin warned that Russian gas supplies to Europe via its largest pipeline could be further reduced and even cut off.
"The risk of gas supplies being completely cut off in the future due to political disputes over the Ukraine war remains, weighing on the EUR," Joseph Capurso, strategist at Commonwealth Bank of Australia, wrote in a note to clients.
Meanwhile, markets are divided on whether ECB policymakers will go ahead with an already announced 25 basis-point hike or a half-point increase to curb galloping inflation, despite palpable recession risks.
The ECB is also likely to announce further details on a new tool to curb the excessive rise in bond yields in the European periphery.
However, the situation is further complicated by the looming collapse of the Italian government