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FOREX-ECB comments suppress euro, dollar perks up ahead of Fed

ForexJan 27, 2021 13:06
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© Reuters.

* Dollar edges up ahead of Fed
* Euro depressed after ECB's Knot's comments
* Sterling hits fresh May 2018 high
* Graphic: World FX rates

By Ritvik Carvalho
LONDON, Jan 27 (Reuters) - The euro fell on Wednesday, under
pressure after a European Central Bank official said the bank
was monitoring the currency closely, while the dollar perked up
ahead of the Federal Reserve's first meeting of the year.
ECB governing council member Klaas Knot said the central
bank has room to cut its deposit rate further, should it be
necessary to improve financing conditions and reach its
inflation target.
Knot's comment constituted the most explicit hint to date
from an ECB policymaker about the possibility of a rate cut to
stem a rally in the euro - a move that seemed highly unlikely
until recently. The single currency is up almost 15% since March last year,
against a dollar that most analysts expect to decline further.
Knot's comments came as the euro, already weaker on the day,
extended losses against the greenback.
It last traded 0.3% lower at $1.2120. EUR=EBS
Analysts said reports on Tuesday that the ECB was studying
whether differences with the Fed's policy in the United States
were boosting the euro - part of a wider review of financing
conditions - would not have a material effect on the currency.
It's "probably one of those headlines where it's a buy on
the dip moment in euro/dollar here," said Jordan Rochester, FX
strategist at Nomura in a note to clients. He remains long on
the pair with a target of $1.25 by the end of March.
Alexandre Dolci, G10 FX strategist at BBVA, has a similar
"Despite the heavy positioning, we continue to favour buying
euro/dollar on dips as we see the pair steadying in a
$1.20-$1.25 range," he said.
ECB President Christine Lagarde has repeatedly said the
central bank is carefully monitoring the single currency's
exchange rate.
"We suspect they might find that higher inflation is more
credible in the US and that euro/dollar spot is closer related
to the global manufacturing sector (which is doing well), not
European services and maybe, that expectations are elevated in
terms of Europe's comeback," said Lars Sparresø Merklin, senior
analyst at Danske Bank. "Either way, this adds to a growing
number of countries who appear uncomfortable with USD weakness."

The dollar reversed early declines in Asia to trade up 0.3%
at 90.393 .DXY as markets waited for comments from Federal
Reserve Chair Jerome Powell, who is likely to renew a commitment
to ultra-easy policy. Powell is due to speak at a news conference after the
central bank's two-day policy meeting, which ends Wednesday.
Earlier this month, he said in a web symposium with
Princeton University that the U.S. economy is still far from the
Fed's inflation and employment goals, and it is too early to
discuss altering monthly bond purchases. "While the Fed had been consistent for the past few months
that the balance of risks was still to the downside, we could
see a more neutral stance being taken," said John Velis, FX and
macro strategist at BNY Mellon.
"This would be seen as a marginally hawkish turn on the
Committee, but we think that the Chair will make it quite clear
that neither interest rate rises nor any quantified timeline for
tapering bond purchases is under consideration."

Elsewhere, the British pound GBP= climbed to its highest
since May 1, 2018 at $1.3753 before trading flat at $1.3730.
The Aussie dollar AUD= slipped 0.4% to 77.18 U.S. cents,
paring Tuesday's 0.5% rally.

World FX rates
Federal Open Market Committee Projections

FOREX-ECB comments suppress euro, dollar perks up ahead of Fed

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