Euro holds recent gains despite high Oil prices with ECB decision in focus

• EUR/USD holds above 1.1630 with rallies capped below Wednesday's highs at 1.1654.
• Risk aversion is likely to keep Euro gains subdued, with all eyes on the ECB monetary policy decision.
• The Dollar remains on its back foot ahead of the US CPI release, which keeps the pair from depreciating further.

The Euro (EUR) edges up against the US Dollar (USD) on Thursday, but remains capped below Wednesday’s highs, at the 1.1650 area so far. The risk-off sentiment amid high Oil prices and surging global yields is likely to keep EUR/USD rallies subdued, with investors awaiting the outcome of the European Central Bank’s (ECB) monetary policy meeting, due later on the day.

The ECB is widely expected to hike rates for the second time this year, bringing its benchmark Rate on Deposit Facilities to 2.5% from the current 2.25%. The main focus of the event, however, will be on President Lagarde’s press conference for further insight into the bank's plans, amid rising inflationary pressures as the Middle East Conflict pushes energy prices higher.

Earlier in the day, Germany’s final Harmonised Index of Consumer Prices (HICP) confirmed preliminary figures of a 0.2% increase in August and a 2.9% year-over-year (Y-o-Y) gain, from 0.9% and 2.8% respectively in July. The impact of these figures on the Euro has been marginal.

Euro holds recent gains as the USD loses its safe-haven role

The Greenback, on the other hand, is failing to draw support from its traditional safe-haven status, weighed down by a mix of circumstances, namely the US Dollar debasement trade, amid the disappointment over the US Treasury's bond buyback program, USD/JPY carry trade unwinding, and growing concerns about the ballooning US government debt.

FX Strategists at Brown Brothers Harriman argue that “even if a September Fed hike becomes a done deal, we doubt USD will make new cyclical highs,” as “tightening by other major central banks limits policy divergence, with the ECB widely expected to deliver a 25bps hike.”

In the US calendar, Producer Price Index (PPI) data, due later on the day, is expected to show that inflation accelerated to a 5.3% Y-o-Y rate in August from 4.7% in July. The main focus this week, however, is on the Consumer Price Index (CPI) release, due on Friday, which will be analysed in detail to confirm market expectations of a Federal Reserve (Fed) rate hike next week.

Euro with Oil prices at four-month highs and ECB decision on the sporlight