Uncertainty over Fed rate path and Europe’s gas crisis dominate currency markets

U.S. dollar, euro and Ukrainian hryvnia banknotes are seen in this illustration taken in kyiv, Ukraine October 31, 2016. REUTERS/Valentyn Ogirenko/Illustration

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LONDON, July 26 (Reuters) – With a U.S. interest rate hike slated for this week and growing uncertainty over the path of Fed policy tightening, the dollar bucked recent highs on Tuesday. two decades, while Russia’s latest gas supply cut kept the euro under pressure.

The US Federal Reserve begins a two-day meeting later today and is expected to propose an interest rate hike of 75 basis points. But many traders are wondering if slowing growth might prompt him to turn away from inflation and signal a slower pace of rate hikes ahead.

Fed key rate futures show rates peaked in January 2023, a month earlier than the February reading they gave last week, while long-term Treasury yields fell around 80 basis points from the mid-June highs.

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This helped send the dollar down about 2.8% from 20-year highs of 109.29 hit against a basket of currencies less than two weeks ago. As of 08:30 GMT, the greenback was flat on the day at around 106.5, while against the euro it firmed slightly at $1.0219.

However, as Fed rate expectations are revised lower, most analysts remain bullish on the dollar, noting signs of a global economic slowdown. Those fears were reinforced on Monday by a profit warning from U.S. retailer Walmart (WMT.N).

This follows several printouts of softer-than-expected US and European data. Read more

Francesco Pesole, FX strategist at ING Bank, attributed the dollar’s loss of momentum to traders who loosened their excessively “long” positions in the greenback.

“The trigger (for the squaring of positions) may have been the reassessment of when terminal rates were reached and the discussion of rate cuts,” Pesole said.

“But there is less scope for dovish repricing at the Fed than at the ECB…Fed prices are more or less in line with the dot plot and inflation/growth outlook,” he said. he added, referring to the chart recording each Fed. official projection of interest rates.

The euro remained locked in uncertainty over Europe’s energy security, with Russia saying gas flows to Germany via the Nord Stream 1 pipeline would fall to 33 million cubic meters per day (bpd) at from Wednesday. This is half the current flow, which is already only 40% of normal capacity. Read more

The single currency’s reaction to the news, however, has been subdued so far, although it raises risks of fuel rationing in Europe and an economic recession.

Pesole said the euro had been prepared for bad news on the gas front, noting that “the incoming news reaction function is not as sharp and will not trigger the same type of volatility as there is a month”.

The euro could weaken, however, if markets actively start pricing in upcoming rate hikes from the European Central Bank – they have already lowered their expectations for September, now pricing in a 39 basis point hike from 50 basis points last week .

Commodity prices support the Australian and New Zealand dollars. The Aussie hit a one-month high of $0.6984 as iron ore hit two-week highs and traders awaited inflation data that may show consumer prices (AUCPIY = ECI) were growing 6.2% year-over-year, the fastest in more than three decades. .

“There could be a slight upside for the Aussie, depending on the data,” analysts at ANZ Bank said. “A 50 basis point hike from the (Reserve Bank of Australia) next week is anything but a foregone conclusion – the main risk is a bigger hike.”

Elsewhere, cryptocurrencies reversed last week’s gains. Bitcoin was sitting at $21,100, its lowest since July 18. Ether also hit its sine low on July 18 at $1,421.

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Reporting by Sujata Rao and Tom Westbrook Editing by Susan Fenton

Our standards: The Thomson Reuters Trust Principles.

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