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The
single currency has rallied more than 3% in the last four
trading sessions on expectations the European Central Bank (ECB)
could deliver a big 50-bps rate hike and a Reuters report that a
key Russian gas pipeline would reopen on time after maintenance.
But investors' mood turned sour on Wednesday with European stock
markets in the red and U.S. stock futures pointing to a rocky
start and weighing on the single currency.
"Fears appear to be rising again about Russian gas supplies to
Europe and the potential for a deep recession there, and this
downbeat sentiment has seen safe haven assets in the ascendancy
again," said Stuart Cole, chief macro economist at Equiti
Capital in London.
On Wednesday the currency firmed as much as 0.5% to $1.02730,
the highest since early June, before easing off those levels and
weakening 0.4% to $1.0173.
Both events - the ECB meeting and the reopening of the Nord
Stream 1 conduit after a 10-day shutdown - are due on Thursday,
leaving markets on tenterhooks.
The event risks lifted short-dated euro-dollar implied
volatility, a gauge of expected swings, to 14%. It touched March
2020 highs above 14.6% on Tuesday.
"A discussion regarding 50 bps is justified and it will all then
depend on what ECB does vis-a-vis the (monetary policy)
transmission protection mechanism and then on further rate
hikes," said Peter Kinsella, global head of FX strategy at asset
manager UBP.
He was referring to the ECB's plans for a so-called
anti-fragmentation tool to shield Italy and other weak euro zone
states from higher borrowing costs. The ECB is meant to detail
these plans at its Thursday meeting.
On Nord Stream, Reuters reported supplies would restart on time,
albeit at well below full capacity.
Against the basket of major currencies in the dollar index, the
greenback rose 0.2% at 106.92.
Markets have pared expectations of a 100 bps U.S. interest rate
rise next week and now see a 23% probability of such a move
after policymakers poured cold water on it.
The Bank of Japan is expected to stick to its dovish stance at
its Thursday meeting. That view held the yen at 138.10 yen per
dollar, not far off 24-year highs.
(Additional reporting by Rae Wee in Singapore; Writing by Saikat
Chatterjee; Editing by Bradley Perrett and Shailesh Kuber)
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