Euro crumbles, traders wait on U.S. consumer test

The euro was huddled at a 16-month low on Tuesday while the dollar was firm as traders awaited U.S. retail sales data, wary a strong reading could stoke inflation and add pressure on the Federal Reserve to hike rates.

Talks between U.S. President Joe Biden and his Chinese counterpart Xi Jinping during the Asia session are also likely to set the tone in financial markets, and currency moves were slightly ahead of any outcome from the discussion.

The yuan was steady at 6.3812 per dollar offshore.

Overnight the euro had crumbled below $1.14 for the first time since July last year amid concerns about Covid-19 outbreaks and as Europe’s central bank chief pushed back against the need to act to tame inflation.

The common currency steadied at $1.1361 after falling as far as $1.1356 on Monday and the drop helped the U.S. dollar index to a 16-month high of 95.595. The dollar was also firm against the yen overnight and broadly steady elsewhere.

It last bought 114.14 yen while the euro sat near the one-month low of 129.64 yen it touched on Monday.

“If we were to take any tightening measures now, it could cause far more harm than it would do any good,” European Central Bank President Christine Lagarde had told European Union lawmakers, a contrast with hawkish hints from elsewhere.

“We expect the cautiousness of the ECB on policy to limit recovery prospects for the euro against the dollar in the coming months,” said Rabobank senior FX strategist Jane Foley.

“Our current mid-2022 forecast of EUR/USD at $1.14 is looking outdated … we will be revising our forecasts later in the week.”

The gulf in tone across the Channel sent the euro on its steepest slide against the pound in six months as Bank of England Governor Andrew Bailey told a parliamentary committee he was “very uneasy” about inflation.

Canada’s central bank chief Tiff Macklem was even more forthright and said “we are getting closer” to rate hikes in a Financial Times opinion piece, driving the Canadian dollar to a four-and-a-half year high against the euro.

Ahead of U.S. retail sales data due at 1330 GMT Australia is in focus with Reserve Bank of Australia (RBA)Governor Philip Lowe making a speech on inflation.

Hawkishness would be a surprise after minutes from this month’s meeting showed the bank still expects it will keep rates on hold at record lows until 2024 even though it acknowledged upside risks on inflation.

“The risks are tilted towards AUD/USD weakness today given the large gap between market pricing for rate hikes in 2022 and RBA rhetoric,” said Commonwealth Bank of Australia analyst Joe Capurso.

The Aussie was last hovering at $0.7346, just below its 50-day moving average of $0.7362. The kiwi is awaiting a Reserve Bank of New Zealand meeting next week and was steady at $0.7040.

Sterling sat at $1.3411.

The U.S. consumption data follows a surprisingly weak consumer sentiment reading last week and an unexpectedly strong Empire State business conditions survey, which had lifted Treasury yields overnight.

It is forecast to show sales accelerating.

“In our view, the forecasts point to decent data, which following last week’s acceleration in the U.S. CPI could increase bets over a hike by the Fed as soon as the tapering process is over,” said Charalambos Pissouros, head of research at JFD Group in Cyprus in a note to clients.

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