Will the Euro Recover the Substantial Losses?

Before the week’s European Central Bank meeting, the U.S. dollar dipped off multi-year highs in early European trade on Monday, while the euro rose above parity.

The Dollar Index fell from last week’s two-decade high of 109.290 to 107.588 at 02:55 AM ET (06:55 GMT). The announcement of consumer price data on Wednesday, which showed inflation accelerating at the quickest rate in four decades, prompted the dollar index to surge to its highest level since September 2002 last week.

However, expectations of a super-sized tightening by the Federal Reserve at its meeting at the end of July have been muted. Fed Governor Christopher Waller and St. Louis Fed President James Bullard, both well-known hawks, favor a 75-bps hike this month. At the same time, Michigan’s 5-Year Inflation Expectations dropped to 2.8 percent for July on Friday from 3.1 percent in June.

Outlook on Euro Movements

Ahead of Thursday’s European Central Bank meeting, when officials should start Europe’s rising cycle with a 25-basis point rise, the EUR/USD pair increased by 0.2 percent to 1.0109, moving farther away from parity. However, given the ongoing political unrest in Italy following Prime Minister Mario Draghi’s departure last week when one of the parties in his wide coalition, the 5-Star Movement, declined to support the government in a parliamentary confidence vote, the pressure might easily come back on this pair.

The stability of the indebted nation, and hence the euro, is in jeopardy if President Sergio Mattarella clings to his position. Mattarella rejected his resignation and summoned the former ECB chief to attend parliament this coming week. Amid worries that Russia will decide to prolong the outage for political reasons, traders are also watching to see if the Nord Stream conduit, which transports gas from Russia to Germany, resumes delivery on Thursday. NS had shut down the pipe for routine maintenance.

In other news, the USD/JPY declined 0.2 percent to 138.21, and the USD/CNY dropped 0.1 percent to 6.7488. The Bank of Japan will convene on Thursday, while the People’s Bank of China should meet on Wednesday. Following the second of three discussions to decide who will succeed Boris Johnson as Britain’s next Prime Minister, GBP/USD increased 0.4 percent to 1.1900.