The euro dipped below $1.16 ahead of the European Central Bank meeting on Thursday as investors wait to hear policymakers’ views on the outlook for inflation and an expected push back against rising interest rate projections.
On a busy day for central bank-driven activity, the Australian dollar dipped on growing speculation about the Reserve Bank of Australia’s tightening plans while the yen was unruffled after the Bank of Japan stuck with its dovish stance.
Analysts expect the ECB to push back against growing expectations for a rate hike next year, even though it may admit that inflation will be higher than projected. Euro zone inflation expectations are also soaring, with one market gauge hitting a seven-year high this month.
The euro was down marginally at $1.1599 by 0705 GMT. The dollar index was little changed at 93.863.
“Most in the market probably expect some kind of pushback against the market pricing of 2022 ECB tightening, where a 10bp rate hike is now priced for next September. This all seems a little obvious and perhaps a reason for EUR/USD not to sell-off were Lagarde to deliver,” ING analysts said in a note.
The Japanese yen nudged slightly higher to 113.74 per dollar but remained close to four-year lows.
The BoJ cut its consumer inflation forecast for the year ending in March 2022 to 0% from 0.6% and as expected the overall takeaway reinforced market bets it will lag other central banks in dialling back crisis-mode policies.
The Australian dollar dipped 0.1% to $0.7516, near its three-month top as Australian bond yields surged to their highest since mid 2019 after the central bank declined to buy a government bond at the heart of its stimulus programme, even though yields were well above its target of 0.1%. [L1N2RO015]
The yield target is central to the RBA’s case that the 0.1% cash rate will not rise until 2024, so any failure to maintain it fuels market wagers that rates will have to rise much earlier, perhaps even by mid-2022.
The Aussie initially fell 0.5% after the RBA statement but soon erased those losses.
“For the first time in what has felt for a long time currencies are really driven by interest rate differentials, as central banks start to telegraph where they are in their normalisation cycles,” said Kim Mundy, senior economist and currency strategist at Commonwealth Bank of Australia.
The Bank of Canada signalled on Wednesday it could hike interest rates as soon as April 2022 and said inflation would stay above target through much of next year, due to higher energy prices and supply bottlenecks.
The U.S. dollar fell against the Canadian dollar on the news and was last at $C1.2367, leaving the loonie close to a four-month high.
In cryptocurrencies, bitcoin rose 1% to $59,007, steadying after its slide from its record high of $67,016 on October 20.