© Reuters. Banknotes in the Saudi riyal, the yuan, the Turkish lira, the pound sterling, the US dollar, the euro and the Jordanian dinar are shown in this illustration taken on January 6, 2020. REUTERS/Dado Ruvic/Illustrative
Written by Joyce Alves and Ray Wei
LONDON (Reuters) – The euro settled near a two-month low on Thursday after data showed that inflation in the euro zone fell more-than-expected last month, supporting arguments for a cautious increase in interest rate hikes by the European Central Bank.
Inflation in the 20 countries that share the euro eased to 6.1% in May from 7.0% in April, less than the forecast of 6.3% in a Reuters poll of economists.
The euro held steady at $1.0690, heading for a two-month low of $1.0635 touched on Wednesday, as the European Central Bank may come under less pressure to extend its monetary tightening much more as inflation shows signs of abating.
The European Central Bank raised its combined base interest rates by 375 basis points to 3.25% over the past year to combat runaway rates.
Money markets are pricing in an 85% chance of a 25 basis point hike by the European Central Bank when it meets on June 15th.
Commerzbank (ETR:) said that with the easing of inflation, the market is no longer certain of a two-step rate of 25 basis points. “This is making life difficult for the euro at the moment,” said Antje Brevc, foreign exchange analyst at Commerzbank.
European Central Bank Vice President Luis de Guindos said Thursday that the central bank has already gone through most of its monetary policy tightening although the cycle is far from over.
King of the dollar
The dollar rose after the US House of Representatives voted to approve a suspension of the debt ceiling, although the US currency drifted from a two-month high as investors cut bets that the Federal Reserve will raise interest rates this month.
The divided US House on Wednesday passed a bill to suspend the $31.4 trillion debt ceiling, and focus now turns to how the Democratic-led Senate fares just days before the federal government is expected to run out of money to pay its bills. .
“Our view is that … the US government will avoid a default that could derail the course of the US as well as the global economy,” said Carol Kong, currency analyst at Commonwealth Bank of Australia (OTC:).
“I think the dollar could gain more support in a successful vote today.”
The currency index, which tracks the currency against a basket of six peers, rose 0.13% to 104.28, and was off a two-month high of 104.7 touched on Wednesday as traders scaled back expectations of another Fed rate hike this month.
Fed officials, including the vice-chair-appointed, indicated a “skipping” of a rate hike in June, giving the US central bank time to assess the impact of the tightening cycle so far against still-strong inflation data.
Markets are now pricing in a roughly 37% chance that the Federal Reserve will raise rates by 25 basis points at its next meeting, compared to a near 67% chance the day before, according to CME FedWatch.
The Japanese yen fell 0.4 percent to 139.87 per dollar.
Japanese financial authorities met earlier this week in the wake of the yen’s fall to a six-month low against the dollar. The country’s top diplomat said Japan would closely monitor the currency’s movements and would not rule out any options.
The Chinese last bought 7.1282 against the dollar, after touching a six-month low in early London trading.
It briefly got some support after a survey of private business on Thursday showed factory activity in China unexpectedly turned to growth in May from a decline in April.
The yuan fell nearly 3% against the dollar in both onshore and offshore markets in May, as China’s post-COVID-19 economic recovery struggled to gain steam.
