Euro Rebounds After Drop on Report ECB May Tweak Inflation View

  • USD sees first gain since June 1 as Comey statement released
  • Thursday packed with event risk, though impact may be limited

The euro rebounded after falling to its lowest in a week following a report that the European Central Bank is considering lowering its inflation projections, while the dollar rose after ex-FBI Director James Comey’s opening statement for congressional testimony on Thursday was released.

The shared currency dropped as much as 0.7 percent versus the dollar before paring that loss to 0.2 percent, injecting a dose of volatility into an otherwise subdued trading session that precedes Thursday’s ECB meeting. A Bloomberg report on the ECB’s shifting inflation outlook dealt a further blow to already diminishing expectations that the central bank may begin to signal a shift in its monetary policy amid recently improved economic growth. Meanwhile, the dollar strengthened after Comey’s written testimony contained little information that hasn’t already been reported.

  • With a singular policy mandate to focus on inflation, any change in ECB inflation expectations would underscore recent remarks from Draghi that there’s no need to shift policies or programs from the currently proposed path. The ECB foresees EU60b monthly asset purchases continuing until the end of 2017 or beyond, as circumstances require
  • The drop in the EUR Wednesday and the release of Comey’s testimony enabled the dollar to rack up its first daily gain since June 1. Trading flows were mostly muted outside of the euro, traders in London said
  • The ECB decision and Comey’s testimony at a Senate Intelligence Committee hearing comprise two of three risk events on Thursday. Comey’s opening statement released by the committee Wednesday said that President Trump asked him to end an investigation into former National Security Adviser Flynn, requesting that he “see your way clear to letting this go”
  • The third event is the U.K. general election. While the vote has the potential to shift the balance of power in Parliament, polling closes at 10pm local time (5pm ET), and thus may have little effect on FX trading during the U.S. session
  • EUR/USD is trading ~1.1253 vs session low 1.1204. EUR faced large 1.1200 expiries Wednesday and sees further expiries at that level Thursday. Additional large expiries are at 1.1100 Friday and may influence trading should the common currency be nearby Friday morning. EUR has stalled repeatedly ahead of 1.1300 in recent sessions as offers at that level and above cap the pair, according to traders familiar with the transactions who asked not to be identified because they aren’t authorized to speak publicly
    • Other recent flows may have been tied to corporate bond issuance after AT&T sold EU7b of fixed and floating rate notes to fund its purchase of Time Warner; some or all of the proceeds may have been converted back to USD via hedging Wednesday or in recent sessions
  • USD/JPY is trading near 109.80 vs after rebounding from the 109.12 low seen overnight. USD gained as the UST 10Y yield rose to a session high above 2.18%, helping to underpin the greenback. Bids are positioned below 109.00 as the pair remains within striking distance of the 2017 low at 108.13
  • GBP touched 1.2968, highest since May 25, as positions were given final tweaks before U.K. voting gets underway. With opinion polls seen still favoring the Conservative Party of PM Theresa May, the pound may post short-term gains if the results match the projections, though the longer-term picture remains clouded by Brexit. Any loss of seats by the Tories, or a hung Parliament, may see the pound drop as far as 1.2000, analysts said. Brexit negotiations with the European Union are due to begin June 19. For an election preview, click here
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