European Central Bank

Euro Recedes Gains as ECB Talks of Tool for Stopping Fragmentation

On Wednesday, the euro receded gains against the US dollar, after the announcement of the European Central Bank (ECB) about introducing a new tool for preventing fragmentation. The central bank also stated that reinvestments of maturing debt would also be skewed in order to assist members who are indebted.

ECB’s Unscheduled Meeting

The announcement of an unscheduled and rare meeting by the ECB had come as a surprise for the markets. The central bank stated after the meeting that the Governing Council has decided to be flexible in terms of reinvesting redemptions in the PEPP portfolio that are about to be due. It said that their goal was to preserve the functioning of the transmission mechanism applicable to monetary policy.

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The announcement of the ECB’s unscheduled meeting had given the euro a lift from lows of one-month, as the bank had claimed to hold it for discussing the current market conditions. There was a 0.17% rise in the single currency against the greenback, as it reached $1.0432. However, it had recorded an increase of as much as 0.7% earlier to reach $1.0508.

There was a 0.1% decline in the US dollar index, which measures the currency against a basket of major peers, as it fell to 105.17, just ahead of the US Federal Reserve’s meeting.

Meeting of the Fed

The policy meeting of the Federal Reserve will come to an end later on Wednesday and markets have predicted that there is an 84% chance of the bank increasing interest rates by 75 basis points. Previously, the expected had been 50 basis points, but bets have gone up because of the higher-than-expected rise in inflation.

The expectations had been adjusted after media reports hinted that the Fed was planning on a bigger rate hike because the data released previous Friday had made it necessary for the central bank to take action for quelling surging inflation. The inflation has reached a high of 40 years, which has become a major concern.

The Dollar’s Path

In the last couple of months, the US dollar had already been gaining steadily because of the rise in interest rates by the Fed before most of the other global central banks. The currency got yet another boost when investors began to seek safe-havens, as they became worried about the economic impact of the aggressive monetary tightening policies.

However, with just a massive hike in interest rates already expected, it is possible that the US dollar may not be able to gain by much after the US Federal Reserve’s decision. This resulted in the index reporting a decline. Market analysts have said that the Fed chair would probably want to keep all options open for now and not share much in the press conference.

Other currencies like yen was also weighed down, as it reached a low of 135.60 against the US dollar. This is a 24-year low, but it did make a recovery during a day and was last trading at 134.33.

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