Uncertainty about the Fed rate path, the European gas crisis dominates the currency markets

U.S. dollar, euro and Ukrainian hryvnia banknotes are shown in this illustrative photo taken in Kyiv, Ukraine, October 31, 2016. REUTERS/Valentin Ogirenko/Illustration

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LONDON (Reuters) – With U.S. interest rates rising this week and increasing uncertainty over the Federal Reserve’s tightening path, the dollar kept the dollar off two-decade highs on Tuesday, while Russia’s latest gas supply cut kept the euro in check. under pressure.

The US Federal Reserve begins its two-day meeting later in the day and is expected to deliver a 75 basis point rate increase. But many traders are questioning whether slower growth could prompt it to shift focus away from inflation and point to a slower pace of rate hikes going forward.

The Fed policy rate futures show that rates peaked in January 2023, a month before the February reading it gave last week, while long-term Treasury yields are down about 80 basis points from their mid-June highs.

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This helped push the dollar toward 2.8% from a 20-year high of 109.29 against a basket of currencies less than two weeks ago. By 0830 GMT, the dollar was flat on the day at around 106.5, while against the euro it was marginally flat at $1.0219.

However, while Fed rate expectations are scaled back, most analysts maintain a bullish view of the dollar, pointing to signs of a global economic slowdown. Those concerns were reinforced on Monday by a profit warning from US retailer Walmart (WMT.N).

This came on the heels of several lower-than-expected US and European data publications. Read more

Francesco Pesol, currency markets analyst at ING Bank, attributed the dollar’s loss of momentum to traders’ retreat from excessive “long” dollar positions.

“The impetus (to square the position) may be to reassess the timing of reaching final interest rates, and to discuss interest rate cuts,” Bisol said.

“But there is less scope for pessimistic re-pricing at the Fed than at the ECB…Fed pricing is more or less in line with the point chart and inflation/growth expectations,” he added, referring to the chart each Fed records. Official interest rate forecast.

The euro remained trapped by uncertainty over Europe’s energy security, with Russia saying the flow of gas to Germany via its Nord Stream 1 pipeline would drop to 33 million cubic meters per day from Wednesday. This is half the current flow, which is already only 40% of the normal capacity. Read more

However, the single currency’s reaction to the news has so far been muted, despite it raising the risks of fuel rationing in Europe and economic stagnation.

Bisol said that the euro prepared to face the bad news on the gas front, noting that “the function of reaction to the incoming news is not sharp and will not lead to the same kind of volatility as it was a month ago.”

However, the euro could weaken if markets begin actively pricing the upcoming rate increases from the European Central Bank – it has already lowered forecasts for September, and is now pricing in a 39 basis point hike from 50 basis point last week.

Commodity prices support the Australian and New Zealand dollars. The Australian dollar hit a one-month high of $0.6984 with iron ore climbing to a two-week high and traders awaiting inflation data that could show consumer prices. (AUCPIY = ECI) It rose 6.2% year over year, the fastest in more than three decades.

“There could be some slight rally in the Australian dollar, depending on the data,” analysts at ANZ Bank said. “A 50 basis point rise from (the Reserve Bank of Australia) next week is nothing but an inevitable result – the main risk is an even bigger rally.”

Elsewhere, cryptocurrencies are paring last week’s gains. Bitcoin settled at $21,100, its lowest since July 18. Ether also hit a low on July 18 at $1,421.

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(Reporting by Sujata Rao and Tom Westbrook; Editing by Susan Fenton)

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