Euro jumps on ECB news, dollar awaits Fed rate decision

News of the European Central Bank (ECB) holding an ad hoc Governing Council meeting to discuss the current market conditions, namely the bond rout, triggered a rally in the shared currency in the early European session on Wednesday. Ahead of the US Federal Reserve’s highly-anticipated rate decision, the US Dollar Index started to pull away from the multi-decade high it set at 105.65 late Tuesday. Industrial Production data will be featured in the European economic docket and ECB President Christine Lagarde is scheduled to speak at 16:20 GMT. The US Census Bureau will release the Retail Sales data for May as well.

While speaking on Tuesday, ECB Governing Council member Isabel Schnabel said that the monetary policy can and should respond to a disorderly repricing of risk premia. “We will react to new emergencies with existing and potentially new tools,” Schnabel added and noted that they are monitoring current market developments closely.

The market expectation points to a 50 basis points (bps) Fed rate hike later in the day. Reports from earlier this week, however, laid the groundwork for a 75 bps hike and the CME Group FedWatch shows that markets are now pricing in a 90% probability of the Fed hiking its policy rate by a total of 150 bps at the next two meetings.

Earlier in the day, the data from China revealed that Industria Production expanded by 0.7% on a yearly basis in May, compared to the market expectation for a contraction of 0.7%. Additionally, Retail Sales declined by 6.7% in the same period but this reading came in better than analysts’ estimate for a fall of 7.1%.

EUR/USD rose sharply toward 1.0500 with the immediate reaction to the ECB news on Tuesday. The 10-year Italian government bond yield is down more than 8% in the European morning and the Eurostoxx futures trade in positive territory.

GBP/USD clings to modest gains above 1.2000 early Tuesday. EUR/GBP advanced to its highest level since late April above 0.8700, making it difficult for GBP/USD to gain traction. BBC reported on Tuesday that the European Union was preparing to take legal action against the UK over changes made to post-Brexit arrangements.

USD/JPY broke below 135.00 on Wednesday ad was last seen trading deep in the red near 134.50. Japanese Chief Cabinet Secretary Hirokazu Matsuno reiterated on Wednesday that the authorities will take appropriate action on forex if required.

Gold is taking advantage of the pullback seen in the US Treasury bond yields early Tuesday and trading near $1,820 following the two-day slump.

Ahead of the first-quarter Gross Domestic Product data from New Zealand, NZD/USD trades above 0.6200. In the early trading hours of the Asian session on Tuesday, the Reserve Bank of Australia will publish its Bulleting for the first quarter and the Australian Bureau of Statistics will release the May jobs report. AUD/USD, which declined to its lowest level since early May at 0.6850 on Tuesday, was last seen posting strong daily gains at 0.6910.

Bitcoin trades at its lowest level since December at $21,200 early Tuesday, losing more than 4% on a daily basis. Ethereum is down 7% and testing $1,100.

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