Riskier currencies rise when the market recovers, while the dollar declines.

LONDON, July 25 (Reuters) - On Monday, as risk appetite returned to the currency markets and investors considered the potential effects of an anticipated U.S. rate hike this week. As the dollar declined, key competitors rose. The currency markets were turbulent. Following a cautious Asian session during which investors were concerned about the prospects for global development, the safe-haven dollar initially increased during early European trading hours. However, the euro stock indices, which had opened in the red, eventually grew when the dollar began to decline at 8:00 GMT.

The U.S. Federal Reserve has indicated that it will raise interest rates by 75 basis points at its meeting on July 26–27, but statistics released last week showing that inflation topped 9.1 percent year-over-year in June boosted the prospect of a larger 100 bps increase later this year. Investors are closely monitoring corporate earnings in the meanwhile. This week, a sixth of the STOXX 600 companies in Europe will release their second-quarter profits, with earnings projected to have increased by 22% year over year. At 1036 GMT, the euro was up 0.1 percent at $1.02195, while the U.S. dollar was down 0.2 percent at 106.49. After the European Central Bank decided to hike rates for the first time since 2011, traders may have covered their short bets in the euro, according to Neil Jones, head of FX at Mizuho, says the source.

According to Reuters, the euro was boosted to a two-week high last week following the rate hike, but it then fell after disappointing business activity data from France and Germany. ING's FX analysts said the source that the euro's moves suggest that expectations around the European Central Bank's policy plans will be driven more by market data in the future, highlighting euro zone inflation data due on Thursday and Friday. 

However, re-testing parity is a real risk in the present high-volatility environment, according to ING. "We anticipate 1.0200 could prove to be an anchor for EUR/USD for the remainder of the summer," the company stated. Germany is on the verge of recession, according to the Ifo Institute, whose business sentiment survey found that corporate confidence in Germany declined more than anticipated in July. This is due to high energy prices and impending gas shortages. According to a poll released on Sunday, 16 percent of German industrial enterprises are reducing production as a result of rising energy costs. For the second quarter in a row, top Western energy companies are predicted to post record profits. The United States' economy is growing less quickly, and inflation is "far too high," according to Janet Yellen, the Treasury Secretary. 

Reuters claimed that in a letter to clients, ING FX analysts stated that "recession fears should continue to hinder a substantial recovery in risk sentiment, which should incidentally provide safe-havens (particularly the USD) some additional support and may keep the path uneven for high-beta commodities currencies." The Australian dollar increased by 0.3% to $0.6948, while the New Zealand dollar increased by 0.2% to $0.6267. The dollar was up 0.2 percent at 136.375 against the Japanese yen. The British pound increased 0.2 percent to $1.2035 against the dollar, while the euro-sterling exchange rate remained unchanged at 84.955 pence per euro. Over the weekend, candidates for the position of British prime minister, former finance minister Rishi Sunak and British foreign secretary Liz Truss, laid out their intentions.

Source:https://www.reuters.com/markets/europe/dollar-firm-fed-meeting-growth-risks-dominate-2022-07-25/