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FX round-up: Euro dips as ECB sounds very dovish note

By Alexander Bueso

Date: Tuesday 18 Jun 2019

FX round-up: Euro dips as ECB sounds very dovish note

(Sharecast News) - Sterling was slightly higher on Tuesday, as voting got under way in the second round of voting to choose the next Tory leader and European Central Bank chief Mario Draghi said rate-setters in the Eurozone were not resigned to simply accepting low inflation.
Against that backdrop, sterling added 0.32% to 1.1209 against the European single currency, although versus the Greenback it was up by barely 0.13% at 1.25499.

Nonetheless, as IG's Chris Beauchamp told clients: "while this vote will be notable in the extent that it quantifies support once again, this evening's appearance by Boris at the BBC debate will likely garner greater attention. The pound's decline into a new five-month low against the dollar this week alludes to the fear over BoJo's willingness to see the UK leave irrespective of whether a deal is agreed upon or not.

"And with three years having passed with little progress, the hopes of finding such a breakthrough in the mere three months between taking office and the October deadline seem slim at best."

Euro/dollar meanwhile was down by 0.21% to 1.11944, even following reports that in February the White House had looked at the practicalities of demoting Federal Reserve chairman Jerome Powell.

To take note of, markets were waiting on the results of the Fed's policy meeting the next day, meaning that many traders were likely sitting on their hands.

According to analysts at Barclays Research, the Fed would downgrade its assessment of business investment, but not of the jobs market, even as it noted the decline in inflation expectations since early May.

They also anticipated that the FOMC would switch in its policy statement from refering to a "patient" approach when setting policy in favour of being "flexible", with the so-called dot-plot graph set to reveal that a few rate-setters were now expecting rate cuts, although the median projection would be unchanged.

More important however would be any guidance from the Fed regarding the likelihood of interest rate cuts in 2019 with Fed funds futures having already fully priced-in two 25 basis points reductions for before the end of 2019 and even odds of a third cut.

Despite all of the above, or perhaps precisely because of it, dollar/yen was drifting 0.07% lower to 108.48.

During the session, Trump also took aim at euro area and Chinese central bankers, whom he said were deliberately weakening their countries' currencies, which triggered a quick rebuttal from Draghi.

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