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Italy’s Crisis Knocks Euro Ahead Of ECB’s Hike

On Thursday, the euro fell as the European Central Bank prepared to hike its interest rate after more than a decade. In addition, the political turmoil in Italy ended up offsetting any relief at the resumption of gas flows from Russia through the largest pipeline in the region.

The euro movements

Traders will not only have to deal with the landmark interest rate hike from the ECB later but also digest a bond market intervention scheme, referred to as the anti-fragmentation plan. The central bank is hoping that it will help in preventing another debt crisis in the eurozone.

Overnight, the euro recorded gains and rose to $1.0230, but declined in Europe to $1.0185. This was after three partners of the coalition government of Italian Prime Minister Mario Draghi snubbed the confidence vote called on Wednesday for renewing the alliance.

Nonetheless, the week has been a strong one for the common currency because of bets that a 50 basis points hike in the interest rate could be seen from the ECB. The news of the Nord Stream 1 pipeline resuming its gas supplies as per schedule had also given the euro some support.

Gas pipeline

The Nord Stream 1 pipeline’s operator stated that gas flows had indeed resumed on Thursday, as per the schedule, and the network regulator in Germany said that they had once more gone back to the level before maintenance had started i.e. at 40% capacity.

Market analysts said that a 50% chance of a 50 basis points rate had been priced in by markets, so a reaction should have been seen. However, it now appears that they are pricing in interest rates of 1% by the year end, which could be difficult to do, considering the circumstances. The rate before the increase stood at -0.5%.

According to experts, the bar is very high because, despite the resumption of the Nord Stream gas pipeline, there is still a risk of tight gas supplies during the winter season. This is because Russian president, Vladimir Putin has warned that gas supplies will be cut down. Plus, US economic growth is also slowing and Italy’s government is just falling apart.

On Wednesday, the European Union informed member states that gas usage should be reduced by almost 15% by March because of the warning of the Russian president. He had said that not only could gas supplies be reduced, but could also be cut off entirely.

Currency movements

Analysts said that political disputes because of Russia’s war with Ukraine would continue to weigh on the euro. Earlier in the day, the Japanese yen managed to shrug off the BOJ’s decision to continue to stick with their easy monetary policy, as expected.

The US dollar climbed up to 138.575 yen, which was below the high of 24 weeks seen last week at 139.38. As for the British pound, the currency was drifting below the $1.20 threshold, as it fell by 0.2% to reach $1.1952, as the number of candidates for the position of British Prime Minister was reduced to two.

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