By Ankur Banerjee and Li Gu
SHANGHAI/SINGAPORE, Oct 29 (Reuters) – The euro was steady on Thursday ahead of a policy decision from European Central Bank, where the focus will be on the bond-market turmoil in France, while the dollar wobbled after the Federal Reserve tempered bets on rate hikes next year.
The ECB is set to keep interest rates on hold in a well-telegraphed decision that is likely to be overshadowed by questions about France and ECB President Christine Lagarde’s own future.
The common currency eased a touch to $1.1145 as of 0348 GMT, after the common currency firmed 0.3% in the previous session following the Fed decision to stand pat on rates as expected.
Worries about France’s ability to tackle its huge debt burden have hurt French government bonds and raised concern about other heavily indebted euro-area countries, weighing on the euro, which is down 5.1% against the dollar this year.
Market sentiment on the euro has been heavily bearish, with speculators accumulating the biggest short euro position in a decade worth $18.89 billion, weekly data from a US regulator showed.
Rushabh Amin, portfolio manager for the multi-asset team at Allspring Global Investments, said emerging and increasing stagflation risks are colliding with fiscal tensions in an already tough growth environment.
“Market pricing indicates just over two-and-a-half hikes by September next year, going into what is likely to be a winter of discontent,’ Amin said.
“Current market pricing is on a collision course with already elevated bond yields globally, together with widening periphery-versus-core spreads, growth will almost certainly be impacted as a result of the recent move higher in yields.”
FED LEAVES RATES UNCHANGED
The Fed opted to delay any changes to borrowing costs until after next week’s midterm election in a 10-2 decision, which came with an upgraded assessment of an economy that the central bank now says is growing at a “strong pace.”
That, along with the confidence expressed by Fed Chair Kevin Warsh that inflation can be lowered to the 2% target without having to “throw sand in the gears” and slow growth or raise unemployment, pushed traders to rein in bets for rate hikes in 2027.
The dollar steadied on Thursday after retreating from a two-week high in the New York session. The dollar index, which measures the greenback against a basket of six currencies, was at 102.18.
The two-year note yield, which typically tracks Fed rate expectations, fell nearly 7 basis points in Asian hours to a low of 4.6705%, extending declines that began after Warsh’s press conference.
Warsh also said the central bank would begin setting aside one of its eight regularly scheduled policy meetings next year and two in 2028 to weigh major issues facing the institution and would not use them to consider changes in monetary policy.
The reworked schedule reads as dovish, analysts at TD Securities said in a note, adding that dedicating those meetings to strategy rather than policy decisions could also produce more extreme and more inter-meeting market moves down the line.
YEN AWAITS BOJ
Attention is also on the Bank of Japan, which concludes a two-day meeting on Friday and is expected to keep rates steady.
Governor Kazuo Ueda is unlikely to give away too much at the post-meeting press conference, said Carol Kong, a currency strategist at Commonwealth Bank of Australia.
Kong said markets expect the BOJ to signal it has met its underlying inflation target and to lay the groundwork for a December rate hike. A failure to deliver such a signal would pose a risk to the yen, she said.
Against the Japanese yen, the dollar was roughly flat at 157.755 yen.
The New Zealand dollar stabilised on Thursday at 0.5622 per dollar, after it had slumped as much as 1.7% after the Reserve Bank of New Zealand held interest rates at 2.75% in a decision that stunned markets. [AUD/]
(Reporting by Li Gu in Shanghai and Ankur Banerjee in Singapore; Editing by Kate Mayberry and Lincoln Feast.)
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