Euro and Sterling Hold Ground as Markets Wait on ECB, Oil Keeps Climbing
Currency desks had a quiet Wednesday, though not an easy one. The dollar sat flat around 101.04 on the index, the euro nudged up 0.1%...
Quick overview
- Currency desks experienced a quiet Wednesday with the dollar remaining flat around 101.04 on the index.
- UK CPI for June decreased to 2.6%, providing mild confirmation that the Bank of England may not need aggressive rate changes.
- Traders are closely watching the upcoming ECB meeting, with expectations that rates will remain at 2.25% but are concerned about the impact of rising oil prices.
- Ongoing tensions in the Middle East and rising crude prices are contributing to a cautious FX market, leading to a lack of bold trading moves.
Currency desks had a quiet Wednesday, though not an easy one. The dollar sat flat around 101.04 on the index, the euro nudged up 0.1% to $1.1420, and sterling held near $1.3448. Traders were not doing much with positions ahead of Thursday’s ECB decision, and with oil back above $94 a barrel, nobody was in a rush to make bold moves.
The pound got a small piece of good news to work with. UK CPI came in at 2.6% for June, down from 2.8% the month before. It wasn’t a dramatic miss but it was in the right direction, and markets took it as mild confirmation that the Bank of England doesn’t need to do anything aggressive on rates for now. For newly installed Prime Minister Andy Burnham, it was a decent early data point to inherit.
The ECB meeting Thursday is what most FX traders are actually watching. Frankfurt is expected to leave rates at 2.25%, so the rate decision itself isn’t really the event. What matters is what Lagarde says about oil. ING’s Chris Turner pointed out that higher energy prices have already pushed markets to price in a more aggressive ECB response relative to the Fed, and he’s skeptical that changes much regardless of the language used at the press conference. Rate differentials have been doing the heavy lifting in EUR/USD, and that probably doesn’t shift on one meeting.
Over in Asia, Bank Indonesia kept rates at 6.25%, which was the expected call. The rupiah ticked up 0.1% after the decision. The yen was also up a touch, moving to around 162.87, though it stayed close to levels that have traders quietly watching for any sign of intervention from Tokyo.
The thread running through all of this is oil and the Middle East. US forces have now carried out eleven consecutive nights of strikes on Iranian military targets. The Houthis are still going after commercial shipping in the Red Sea. Neither of those things looks close to stopping, and crude prices reflect that. As long as oil keeps rising, inflation stays sticky, and central banks stay cautious, the FX market is going to keep drifting rather than moving.
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