Euro edged down but set for biggest monthly gain in a year Reuters

© Reuters. In this illustration taken on May 30, 2022, a woman holds euro banknotes. REUTERS/Dado Ruvic/Illustration

Alan John

HONG KONG (Reuters) – The euro gave up some of its recent gains on Tuesday but was still on track for its best month in a year on expectations of a hike in European interest rates and a possible slowdown in U.S. interest rates.

The euro was at $1.0745, down 0.3%, after hitting a five-week high of $1.0786 overnight as German inflation rose to its highest level in nearly half a century in May, driven by soaring energy and food prices.

That reinforced the case for a more aggressive rate hike by the European Central Bank, which is expected to start raising rates in July for the first time since the pandemic began.

Euro zone CPI data is due later on Tuesday, with German data suggesting it could also beat expectations, analysts at CBA said.

In addition, “there are a number of ECB officials speaking tonight undoubtedly talking about the prospect of higher interest rates in Europe,” they said in a note to clients.

The euro is also set to gain 2.2% in May, its biggest monthly gain in a year.

The pair was at 101.63, having fallen to a five-week low of 101.29 overnight. The index measures the dollar’s six heaviest-weighted peers against the euro.

“The focus has shifted from rising inflation and more rate hikes to concerns over whether Fed tightening is weighing on the economy, which has led to a weaker dollar in the past few weeks,” said Redmond Wong, market strategist at Saxo Markets Hong Kong.

He added, however, that it was uncertain whether the Fed would abandon the aggressive pace of tightening, pointing to hawkish comments from Fed Governor Christopher Waller overnight, noting that “there is therefore a possibility of a reversal of the dollar’s weakening trend.”

A rebound in sentiment toward riskier assets and currencies, partly due to the easing of lockdowns in China’s financial capital Shanghai, has also weighed on the safe-haven dollar recently, investors said.

European Union leaders agreed in principle on Monday to cut most oil imports from Russia by the end of the year, sending oil prices higher and boosting commodity currencies, sources said.

The Canadian dollar touched 1.2653 against the greenback, near a one-month high hit overnight. The Australian dollar rebounded from a low of $0.7163, also benefiting from better-than-expected PMI data from China, and was last at around $0.7180.

Leading the way at around $31,600 and above $32,000 for the first time in three weeks.

Sterling was at $1.263, up 0.5% on the month against the greenback, its first monthly gain since 2022.

The yen traded at 128.15 to the dollar, softening on the day but on track for its strongest month since July last year.

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