LONDON: The dollar strengthened on Thursday, reversing its weakening trend of the past seven days, while the euro slipped ahead of a European Central Bank meeting at which policymakers could step up stimulus measures.
The ECB is expected to increase the size of its 750 billion euro ($840 billion) Pandemic Emergency Purchase Programme (PEPP) to support Europe's weakest economies – although some investors think this will happen at July's meeting rather than today.
The euro has gained around 3.6% versus the dollar since France and Germany proposed an EU-wide recovery fund to share the cost of the coronavirus crisis on May 18.
But on Thursday it changed course, falling 0.3% to $1.1202 by 1025 GMT.
Kenneth Broux, FX strategist at Societie Generale, said it was consolidating recent gains as the market waits to see the outcome of the ECB meeting.
“The euro-dollar is overbought, technically, so there's a good reason to take a bit of profits. It does not mean that we can't go higher, in the next week or two weeks or so," he said.
Broux said that there is potential for market disappointment today as the market expects the ECB to increase the PEPP programme. If they do not, the euro could reverse back to 1.07 versus the Swiss franc and euro-dollar could go below 1.12 this afternoon, he said.
One argument against the ECB announcing more policy easing on Thursday is the slow progress in the European Union's effort to finalise its recovery fund proposal. The ECB could hold out to keep up pressure on EU political leaders.
“For EUR, the direct implications of increasing the size of the PEPP are limited, but combined with the developing recovery fund, the implied improvement in the responsiveness of policy is positive," said Adam Cole, chief currency strategist at RBC Capital Markets.
But Commerzbank's FX and EM analyst Thu Lan Nguyen said that any further gains for the euro could be limited by a large amount of positive economic news already being priced in by investors.
The central bank delivers its policy decision at 1145 GMT and ECB President Christine Lagarde holds a news conference at 1230 GMT.
The dollar rose around 0.2% against a basket of currencies, having weakened in the last week as global markets grew more optimistic about an economic recovery. The US currency began strengthening in overnight trading, picked up more sharply between 0600 GMT and 0840 GMT, then started weakening again.
The safe-haven Japanese yen fell to new two-month lows versus the US dollar, at 109.165 at around 0830 GMT. .
Riskier currencies retreated from recent highs. The Australian dollar was down around 0.3% at $0.6899, having hit a low of $0.6882.
Australian retail sales suffered a historic plunge in April while the trade surplus narrowed as the coronavirus battered the economy, leaving the nation facing its worst ever contraction in the current quarter.
The Norwegian crown, edged down from recent three-month highs against the dollar and euro.
Goldman Sachs analysts recommended in a note to clients that investors go short on USD/NOK.