Dollar, euro trade sideways after ECB pushback

NEW YORK, (Reuters) - The dollar strengthened while the euro fell in sideways trade Tuesday. This was a day after Christine Lagarde, President of European Central Bank, lowered expectations of aggressive interest rates hikes that have spooked bond market markets.

BREAKING
09 February 2022 Wednesday 03:33

Dollar, euro trade sideways after ECB pushback

Markets were caught off guard by the Federal Reserve and the ECB's more hawkish tone last week. This caused yields to soar on U.S. and eurozone debts in anticipation that rates will rise faster than expected.

The market is still waiting for U.S. consumer prices data on Thursday, which will see little change in the currency markets. According to Reuters, economists forecast that the January year-over-year CPI would be 7.3%.

The dollar index rose 0.2% while the euro fell 0.21% to $1.1418.

John Kicklighter (chief strategist at DailyFX) stated that market expectations of a rate increase in tandem have created some unusual price action.

Kicklighter stated that "it inevitably must snap back to some degree of normalcy," suggesting that the idea of seven Fed rate increases this year is too ambitious and unlikely to occur.

He stated that "Eventually, the markets will have too much to expect and that's likely to settle some volatility."

On Tuesday, the yield on U.S. 10-year Treasuries rose to 1.97%. This is the highest level since November 2019, and an increase from 1.73% only two weeks ago.

According to CME's FedWatch Tool, markets are pricing in a more than 70% chance of a 25-basis point increase and nearly 30% chance of a 50-basis point rise when U.S. policymakers meet March.

Marc Chandler, chief market strategist for Bannockburn Global Forex, stated that the market is "largely sideways" while we wait for Thursday’s CPI. Everyone knows it will be up.

He said, "It's all a matter of what's happening in the debt market." "For the second consecutive day, the yield on the German two-year bond is lower. This stops a nine-day rise. It was due to Lagarde's yesterday pushback."

On Monday, the German two-year bund jumped to -0.328% from -0.654 on January 25. On Tuesday, the yield fell 0.4 basis points to -0.30%.

Particularly acute bond concerns were felt by the so-called "perimeter" economies of Europe, where inflation-adjusted Italian yields are in close proximity to reaching positive territory.

Lagarde spoke more cautiously, saying that high inflation is unlikely not to become entrenched. Pablo Hernandez de Cos, ECB member, said Tuesday that any central bank action "has to be gradual".

"Can the euro rise if there are more periphery spreads and positive 10-year real yields in Italy?" How can the economy handle that? Kenneth Broux is a strategist at Societe Generale in London. "That's the million-dollar question investors are asking."

Investors are closely monitoring the future course of U.S. and European rates as the Fed is expected to raise rates more than the ECB in the coming months.

Money markets had been pricing in as high as 134 bps cumulative rate hikes by the Fed this year. Analysts however expected 50 bps hikes by the ECB.

The short-term outlook is still favorable for the single currency. In late January, the spread of bond yields between U.S. 10-year debt and German 10-year debt narrowed to 170 bps, from 194 bps in April.

Bitcoin surpassed its 50-day average and reached $44,000 on Monday. It held there in Asia for a gain greater than 17% in just four sessions.

Bitcoin fell to $43,346.00 last week, 1.72% lower than the previous low.

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Exchange bid prices at 3:24PM (2024 GMT).

Description RIC U.S. Close Pct. Change YTD High Bid Low BID

Session

Dollar index 95.5850 95.4100 +0.20% +0.082% +95.7540+95.3960

Euro/Dollar $1.1418 $1.1442 -0.20% +0.45% +$1.1448 +$1.1397

Dollar/Yen 115.5050 115.0900 +0.38% +0.36% +115.6200 +115.0600

Euro/Yen 131.88 131.68 +0.15% +1.20% +132.0300 +131.4900

Dollar/Swiss 0.9249 0.9235 +0.19% +1.44% +0.9263 +0.9226

Sterling/Dollar $1.3550 $1.3535 +0.11% +0.19% +$1.3563 +$1.3509