SINGAPORE (Reuters) – The euro held firm on Thursday ahead of a European Central Bank policy decision, with the focus on what the ECB might say about the currency’s recent strength and how that may influence the policy outlook.
The euro edged up 0.1 percent to $1.1925, still some way off last week’s high of $1.2070, its highest level since January 2015.
The common currency has lost some momentum since hitting that 2-1/2 year peak, weighed down by rising expectations that a stronger euro could slow the ECB’s plans to rein in its bond-buying stimulus.
Only 15 of 66 economists polled by Reuters expect the ECB to announce a reduction of its monthly asset purchases at Thursday’s ECB policy meeting — a sharp reversal from a month ago when slightly over half of respondents expected such a move.
ECB President Mario Draghi is set to start laying the groundwork for stimulus reduction at Thursday’s meeting, but will probably hold off on any major commitment.
One focus is whether Draghi will express any reservations about the recent strength in the euro, which has gained more than 13 percent against the dollar this year.
Jasslyn Yeo, global market strategist for J.P. Morgan Asset Management, said it wouldn’t be surprising to see Draghi raise concerns about the euro’s strength, which will exert downward pressure on euro zone inflation.
That would force the ECB to take a slower approach toward policy normalisation, and the euro looks susceptible to a pull-back against the dollar in the near-term, Yeo said.
“Markets have become too optimistic on the continued recovery in euro area growth,” Yeo said, adding that markets also seemed to be taking an overly pessimistic view of recent weakness in U.S. inflation data.
The euro could rally if the ECB and Draghi refrain from commenting on the currency’s rise, said Tareck Horchani, head of sales trading in Asia Pacific for Saxo Markets in Singapore.
On the other hand, if they do express concerns and the euro sells off, the common currency will probably find support in the $1.17 to $1.18 area, Horchani said.
LOONIE LIFTS OFF
The Canadian dollar last traded at C$1.2229 per U.S. dollar, taking a breather after rallying on an interest rate hike by the Bank of Canada.
On Wednesday, it had scaled a high of C$1.2140, its highest level since June 2015, after the Bank of Canada surprised many by raising interest rates. Most analysts had expected the bank would wait until October to raise rates.
The U.S. dollar eased 0.2 percent to 109.05 yen, but remained above a one-week low of 108.45 yen set on Wednesday.
Although the dollar gained a lift on Wednesday, helped by relief over U.S. President Donald Trump’s surprise deal with the Democrats on extending the debt limit, lingering concerns over North Korea related tensions may limit the dollar’s upside versus the Japanese currency, said Saxo Market’s Horchani.
Trump agreed with Democrats in Congress on Wednesday to extend the U.S. debt limit and provide government funding until Dec. 15, potentially avoiding an unprecedented default on U.S. government debt.
The yen has risen against the dollar and also versus the South Korean won this week, as geopolitical tensions simmered after North Korea conducted a powerful nuclear test on Sunday, dampening investors’ appetite for riskier assets.
Japan is the world’s largest net creditor nation, and at times of uncertainty traders assume Japanese repatriation from foreign countries will eclipse foreign investors’ selling of Japanese assets.
As a result, the yen has continued to behave as a safe-haven currency despite Japan’s proximity to North Korea.
Reporting by Masayuki Kitano; Editing by Kim Coghill and Sam Holmes