Euro rebounds to two-week high on bets ECB to signal stimulus unwind

LONDON - 7 June 2018: The euro climbed to a two-week high on Thursday as investors raised their bets that the European Central Bank will next week signal a winding down of its vast bond-buying program by the end of this year.

The central bank’s chief economist Peter Praet, a close ally of President Mario Draghi, said on Wednesday that the ECB would debate next week whether to end bond purchases later this year.

Jens Weidmann, the head of Germany’s central bank, said expectations the ECB would taper its bond-buying program by the end of this year were plausible while his Dutch counterpart, Klaas Knot, said there was no reason to continue a quantitative easing program.

The comments drove the euro to a two-week high of $1.1828 EUR=, up half a percent on the day.

Traders, however, said the euro’s strength much above $1.18 was limited.

Continuing concerns about a trade war and the possibility of a more hawkish Federal Reserve when it meets next week will keep the euro’s recovering in check.

“The ECB will want to retain flexibility over the end date for QE until later in the year and thus it is unclear that euro/dollar, especially with a potentially hawkish Fed, has much more immediate upside above the 1.1850 area,” ING said in a note.

Many market players were surprised by the flurry of ECB comments as they had thought uncertainty caused by a political crisis in Italy could make policymakers cautious about indicating an end to stimulus at its policy meeting on June 14.

The Federal Reserve is widely expected to raise interest rates for the second time this year on Wednesday.

“So speculators are bidding up the euro ahead of the meeting next Thursday. I bet some of them will aim to take profits before the event. The same can be said for the dollar/yen as they are buying the dollar ahead of the Fed’s meeting,” said Mitsuo Imaizumi, chief currency strategist at Daiwa Securities

The dollar index .DXY slipped 0.4 percent to its weakest since May 22, helping several currencies including sterling GBP= and the yen JPY= claw back some of their recent losses versus the greenback.

Some emerging market currencies also rose, although the Turkish lira TRY= was down ahead of a rate decision.

The dollar hit a two-week high of 110.27 yen in late U.S. trade on Wednesday before giving up gains in Asia. The U.S. currency fell 0.2 percent to 109.98 in early European trading.

The Australian dollar dipped 0.2 percent against the dollar to $0.7653 AUD=, off a 1-1/2-month high of 76.77 cents touched on Wednesday, supported in part by the country's strong economic growth data.

The improving market mood on the back of easing worries about Italian politics and the strength of high-tech shares has supported currencies such as the Australian dollar in the past week, and has weighed on a low-yielding yen.

But many investors are cautions and risk appetite remains fragile, especially ahead of a summit this weekend of the Group of Seven leaders when President Donald Trump looks set to clash with his counterparts.