Euro wavers as traders await EU policy response to war in Ukraine

The euro gave back some of its overnight gains on Thursday, after its biggest daily jump since 2016, as traders waited for the European Central Bank and European Union leaders to shed light on the bloc’s policy response to Russia’s invasion of Ukraine.

The common currency on Wednesday benefited from a risk-on shift in sentiment that lifted equity markets and bond yields and saw oil prices drop amid optimism about diplomatic efforts to resolve what the Kremlin refers to as a “special operation” to disarm Ukraine.

The euro has been widely seen as a gauge of Europe’s biggest security crisis since 1945 and touched a 22-month low of $1.0804 earlier in the week, with investors expecting a sizeable impact on European growth.

The foreign ministers of Russia and Ukraine met on Thursday in Turkey, the highest level contact between the two countries since the war began on Feb. 24, but in simultaneous duelling news conferences made clear they had made no progress.

At 1128 GMT, about an hour ahead of the ECB meeting, the euro was trading at $1.1046 , down 0.28% after jumping 1.6% on Wednesday, its best day in nearly six years.

ECB policymakers may give clues about how they intend to balance the risk of higher inflation with the damage war in Ukraine will cause to economic growth.

“We think that normalization of monetary policy is likely to be delayed but not derailed,” Unicredit analysts wrote in a morning note.

Investors currently expect the central bank to gradually phase out its pandemic bond-buying scheme and hike its key interest rate by a total of about 33 basis before the end of the year.

The ECB is trailing other major central banks such as the U.S. Federal Reserve and the Bank of England in the post-pandemic tightening cycle, which has weighed on the euro.

Georgette Boele, an FX strategist at ABN AMRO, said in a note she expected the euro to continue on its downward trend and move lower or even below parity with the dollar.

Recent speculation that EU leaders were considering joint bond issuance to finance energy and defence spending have, however, boosted the currency. The bloc’s summit will begin later today in Versailles, west of Paris.

The dollar index was up 0.19% after falling 1.17% on Wednesday and traders were waiting for U.S. inflation figures, also due later in the day, to further guide expectations for the Federal Reserve’s meeting next week.

While the Fed is widely expected to raise its benchmark overnight interest rate by a quarter of a percentage point, growing calls before the war for a larger half a percentage point rise have quietened.

Economists polled by Reuters forecast the U.S. Consumer Price Index to have climbed 7.9% on a year-on-year basis in February, up from 7.5% in January, although this data will only show a preliminary impact from the surge in oil prices caused by the conflict.

Elsewhere, sterling was down 0.18% at $1.3163 after jumping 0.65% overnight along with the euro, while the safe-haven yen was at 115.95 per dollar, close to its lowest in a month, hurt by a rise in sentiment towards riskier assets like equities.

Bitcoin fell nearly 7%, erasing most of the gains it made the previous day after U.S. President Joe Biden’s executive order requiring the government to prepare reports on the future of money calmed market fears about an immediate regulatory crackdown on cryptocurrencies.

Asian stocks rallied on Thursday, echoing overnight gains on Wall Street where a tumble in oil prices sent stocks higher

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