Euro retreats after hitting five-month high on dollar
The euro edged lower yesterday after hitting a five-month peak against the dollar and an 11-month high against the yen, with near-term strength seen as limited as an expected rate rise was mostly priced in.
The ECB is widely expected to raise rates by 0.25pc at its policy meeting on Thursday, in order to battle rising inflationary pressures in the eurozone. Two more 0.25pc rate hikes are factored in by year-end.
Traders expect the euro to stay near current levels in the coming days, with resistance seen around $1.4281 -- the November high.
The single currency could struggle to extend gains unless ECB president Jean-Claude Trichet sounds a surprisingly hawkish tone on inflation, analysts said.
"Market participants will likely remain reluctant to push too hard on the short side of the euro ahead of the ECB rate decision," said Dan Cook, chief executive of IG Markets in Chicago.
Technical analysts also highlighted the trend line resistance drawn from the euro's record high struck in July 2008 coming in at around $1.43.
Risks for this week include a number of central bank rate decisions in the developed world and a slew of speakers from the US Federal Reserve that could result in investors adopting a wait-and-see stance.
The Bank of Japan is likely to downgrade its economic assessment and keep policy very loose tomorrow, while comments from Federal Reserve officials highlighted divergence and uncertainty over the need to tighten monetary policy in the United States.
The euro briefly popped above 120 yen for the first time since May 2010 but retreated to 119.29 yen, down 0.3pc on the day.
Against the yen, the dollar fell 0.1pc to 83.99 yen. It had hit its highest level since September 2010 on Friday on trading platform EBS, stalling ahead of an option barrier at 84.75 yen. Traders reported good interest to sell dollars into the 85.00 yen area.
It rose above its 200-day moving average last week, in a sign that the recent downward trend against the yen may have finally run its course.