The euro and sterling rose on Monday against safe-haven currencies, supported by improved global risk sentiment in a quiet trading session due to a holiday in the United States.
European stocks (.STOXX) and Britain’s FTSE share index (.FTSE) rallied on Monday, helped by gains in oil and gas companies. U.S. markets are closed for Independence Day.
Sterling and the euro gained some ground against the U.S. dollar, the Japanese yen and the Swiss franc .
The single currency rose 0.2% to $1.0440 against the dollar, but stayed barely above May’s five-year trough of $1.0349, while sterling rose 0.4% to $1.2143 after hitting a two-week low of $1.1976 on Friday.
“Quiet trading to start the week is seeing the U.S. dollar weaken against most major currencies as it unwinds Friday’s gains,” said Shaun Osborne, chief FX strategist at Scotiabank.
Reports that the White House will announce an easing of some Chinese tariffs later this week in an attempt to dampen elevated inflation helped inject some optimism back into markets, Osborne added.
But amid fears of a global recession, the euro remained near a five-year low against the dollar.
The war in Ukraine and its economic fallout, in particular soaring food and energy inflation, has been a major drag on the euro, which has weakened 8% against the dollar this year. The difference between the European Central Bank and the U.S. Federal Reserve response to higher inflation has also weighed on the euro.
Data on Friday showed euro zone inflation surging to another record, adding to the case for the ECB to raise interest rates this month for the first time in a decade.
Jeremy Stretch, head of G10 FX strategy at CIBC said he expected headwinds on the euro to persist as the ECB is set to hike rates on July 21 by “a mere 25 basis point”.
“ECB action remains moderate when compared with a 75bps Fed hike,” he said. “Beyond ECB monetary policy discussion, the primary European Union risk variable relates to the energy sector.”
Safe-haven demand has kept the dollar elevated even if markets have scaled back some of their U.S. rate hike expectations. The market is pricing in around an 85% chance of another hike of 75 basis points this month and rates at 3.25% to 3.5% by year-end, before cuts in 2023.
The U.S. dollar index eased 0.03% to 105.02, not far below last month’s two-decade high of 105.790.
Looking ahead to the rest of the week, investors are awaiting publication of minutes from last month’s Fed meeting on Wednesday and U.S. employment data on Friday.
Australia’s central bank will meet on Tuesday and markets have priced in a 40 basis point (bp) rise in interest rates. The Aussie may not catch much of a boost if a hike of that size, or thereabouts, is delivered.