Dollar Edges Lower; Euro Gains Ahead of ECB Meeting

The U.S. dollar edged lower while the euro bounced in early European trade Thursday, with risk sentiment boosted by the resumption of Russian gas flows to Western Europe although the upcoming European Central Bank meeting prompted some caution.

At 3:20 AM ET (0720 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 106.763. EUR/USD rose 0.3% to 1.0211, not far off Wednesday’s intraday peak of 1.0273, the highest since July 6.

The single currency has been boosted by the news that Russia restarted earlier Thursday sending gas through its biggest pipeline to Europe after a 10-day maintenance period.

Restoring flows to the levels requested will take some time, according to a spokesperson for Nord Stream, but the fact that Russia hasn’t chosen to make a political point by halting the flows for longer will provide some relief for the continent that still relies heavily on Moscow for its energy.

That said, there remains a degree of caution within the markets ahead of the latest European Central Bank meeting, at which the policymakers are expected to deliver their first hike since 2011.

ECB President Christine Lagarde previously telegraphed a 25 bps increase for this meeting, but press reports earlier this week suggested the policymakers would discuss a half-point rise to try to curb soaring inflation, which was confirmed at an annual 8.6% in June earlier this week, despite the risks of a recession.

The ECB is also expected to provide more details of a new tool aimed at controlling dramatic rises in bond yields on Europe’s periphery, an instrument that could well be shortly needed given the potential collapse of the Italian government.

Italian Prime Minister Mario Draghi won a confidence motion in the upper house Senate late Wednesday, but three main coalition parties refused to take part in the vote, which could force the widely respected former head of the ECB to leave office.

The yield of the 10-year Italian BTP jumped 15 basis points higher Thursday, to trade at 3.627, with the spread to the German equivalent widening sharply.

“We think the details will not convince markets,” said analysts at Nordea. “Even if they do, the ECB is unlikely to be willing to use the full firepower of the instrument, unless absolutely necessary.”

Elsewhere, USD/JPY rose 0.3% to 138.59, consolidating below last week’s 24-year high of 139.38, after the Bank of Japan maintained its ultra-easy monetary policy despite raising its inflation forecast and warning of risks to the economic outlook.

GBP/USD edged lower to 1.1966 with the field of candidates vying to be Britain’s next prime minister narrowed to two, while the risk-sensitive AUD/USD traded flat at 0.6885.

Additionally, USD/TRY rose 0.1% to 17.6254 ahead of the latest meeting of the Turkish central bank. This is expected to see the policymakers keeping their key rate at 14% on Thursday, defying a global shift toward aggressive monetary tightening despite soaring inflation.