By Peter Nurse
Investing.com - The U.S. dollar edged lower in early European trade Monday, nudging down from multi-year highs, while the euro climbed away from parity ahead of the week’s European Central Bank meeting.
At 02:55 AM ET (0655 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.3% lower to 107.588, dropping back from last week's two-decade high of 109.290.
The dollar index soared to its highest level since September 2002 last week following the release of consumer price data on Wednesday showing inflation racing at the fastest pace in four decades.
However, expectations of a super-sized tightening by the Federal Reserve of at least 100 basis points at its meeting at the end of July have been reined in, with Fed Governor Christopher Waller and St. Louis Fed President James Bullard, both known hawks, favoring a 75 bps hike for this month, while Michigan 5-Year Inflation Expectations fell to 2.8% for July on Friday, from 3.1% in June.
EUR/USD rose 0.2% higher to 1.0109, climbing away from parity ahead of Thursday’s European Central Bank meeting, where policymakers are expected to begin Europe's hiking cycle with a 25 basis point increase.
However, pressure could easily return on this pair given the ongoing political uncertainty in Italy after Prime Minister Mario Draghi tendered his resignation last week after one of the parties in his broad coalition, the 5-Star Movement, refused to back the government in a parliamentary confidence vote.
President Sergio Mattarella rejected his resignation and asked the former head of the ECB to address parliament this coming week, but if the widely respected leader sticks to his guns then the stability of the debt-laden country, and thus the euro, is at risk.
Additionally, traders are looking to see if the Nord Stream pipe from Russia to Germany resumes supplying gas on Thursday after a shutdown for scheduled maintenance, amid fears that Russia will choose to prolong the outage for political reasons.
“EUR/USD appears primarily driven by other factors (macro picture, Russian gas supply, Fed pricing), but history tells us that political risk can cause a significant build-up in the risk premium on EUR/USD, so that’s a threat not to be ignored,” said analysts at ING, in a note.
Elsewhere, USD/JPY fell 0.2% to 138.21 and USD/CNY fell 0.1% to 6.7488, with the Bank of Japan set to meet on Thursday while China's central bank meets on Wednesday.
GBP/USD rose 0.4% to 1.1900, following the second of three debates to determine who will succeed Boris Johnson as Britain’s next Prime Minister.
Conservative MPs vote to eliminate one candidate on Monday afternoon before a final televised leadership debate on Tuesday. The final two candidates will be decided by a vote of MPs on July 21.
Risk sensitive AUD/USD rose 0.3% to 0.6812, while NZD/USD rose 0.1% to 0.6166 after annual New Zealand inflation rose to 7.3% from 6.9% in the first quarter, climbing to a fresh 32-year high.