The euro recorded a sharp rally on Thursday as investors price in the possibility of an aggressive policy outlook by the European Central Bank (ECB) in the near term, amid a retrace in the dollar following significant gains in previous sessions.
Reports show that money markets are pricing in a potential 106 basis points (bps) interest rate hike by the ECB from 95 bps on Tuesday. Meanwhile, US money markets continue to discount about 200 bps of Fed rate hikes by December.
That said, risk appetite in the forex market remains thin as Wall Street recorded a massive slide over the week, with investors worrying about the implications of the Ukraine war and global inflation.
However, risk sentiment could record a boost soon amid “positive developments with Shanghai’s Covid restrictions, and authorities backing more easing in the near future,” according to Mizuho strategists.
Many Shanghai residents were pleased to find out they could go shopping for groceries as usual for the first time in almost two months, as Chinese authorities plan to lift the city-wide COVID-19 lockdown.
Dollar Falls Against Euro as DXY Resumes Descent
The US dollar index (DXY), which tracks the greenback’s performance against six major counterparts, has dropped by over 1% in the North American session on Thursday, touching a low of 102.77.
Commenting on the outlook for the dollar, the global head of foreign exchange at Deutsche Bank, George Saravelos, noted: “We argue that a turning point (for the US dollar after recent gains) is close.” Saravelos added:
“Because we are now at a stage where a further deterioration in financial conditions undermines Fed tightening expectations, while there is still significantly more tightening to be priced-in for the rest of the world, especially Europe.”
At press time, the EUR/USD pair trades up by 1.01% after the pair tapped a weekly high of 1.0580.
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