Euro recovers but markets wary before bank summit
The euro rebounded from the day’s lows yesterday but held well below a two-and-a-half-year high hit earlier this month as markets bet the single currency’s double-digit gains this year may be too much for a central bank that is still wary of removing stimulus.
Market watchers are focused on the annual central banking conference in Jackson Hole this week where the world’s top central bankers may signal their next policy actions – though Bank of England Governor Mark Carney will not attend.
Although bets of a policy change have been reduced in recent days amid the general political turmoil in the US, expectations of a Fed rate hike may rise if chair Janet Yellen emphasises that the risks to inflation objectives and financial stability require careful monitoring in her speech on Friday.
“If Yellen makes this point in her Jackson Hole speech, that reinforces the likelihood that the FOMC will raise rates again at their meeting in December,” said Jordan Rochester, an FX strategist at Nomura in London.
Yesterday, the euro bounced off the intraday lows to trade broadly flat at $1.1763 against the greenback.
It rose to a two-and-a-half-year-high above $1.19 earlier this month.
Despite recent losses, it is still up more than 11pc so far this year, making it the best performing currency in the G10 currency space.
“Absent some Mario Draghi fireworks this week, buying on dips for euro/dollar may be a better strategy rather than chasing the euro higher at these levels,” said Viraj Patel, an FX strategist at ING Bank in London.
European Central Bank president Mr Draghi will not deliver a new policy message in Jackson Hole, two sources familiar with the situation have said, tempering expectations for the ECB to start charting the course out of stimulus.
But traders are not taking any chances.
About $45bn (€38bn) of euro-dollar currency options on the exchange rate will expire in the three days leading up to the Wyoming meeting.
With markets hemmed in tight ranges and the lack of any top tier data, the dollar index drifted higher to 93.56 yesterday with latest positioning data showing speculators reducing their bearish bets against the greenback.
Investors cut short dollar bets, particularly against the Japanese yen with positioning seen stretched before Ms
Yellen’s speech at the conference. (Reuters)