The dollar index gained 0.4% Wednesday, led by a drop in EUR/USD as investors worried about looming risks including the ECB's inaugural rate hike and anti-fragmentation plan, the Nord Stream gas pipeline reopening nL8N2Z12JMnS8N2VX064 and Italian political disarray nR1N2UZ00C.
The market is torn between expecting a 25 or 50bp rate hike from the ECB at Thursday's meeting, leaving room for disappointment on both sides, while investors will scrutinize the ECB's plan to keep euro zone bond markets orderly.
BTP-bund yield spreads surged higher as Italy's government imploded when some of Prime Minister Mario Draghi's main coalition partners snubbed a confidence vote he had called to try to end divisions nL1N2Z10E6.
More dour U.S. housing data nL1N2Z02G3 and a jump in Chinese COVID cases nK7N2Y100F, added to the gloom, as did a comment from Russian Foreign Minister Sergei Lavrov, who said that Moscow's military "tasks" in Ukraine now went beyond the eastern Donbas region.
EUR/USD fell 0.5% amid late-day selling as 10-year BTP-bund yield spreads widened by a drastic 30 bps from intraday lows.
EUR/USD's 1.0273 Wednesday high on EBS ran into sellers by the daily kijun and 50% Fibo of the June 27 to July 14 drop to 0.9952 drop at 1.02835, as well as the falling 21-day moving average at 1.0291.
Thus the burden of proof is back on EUR/USD bulls, the ECB and European politicians to prevent the broader downtrend from resuming nL1N2Z110L, with euro zone consumer confidence having hit a record low in July nS8N2Y800F.
Sterling got an early bounce on above-forecast UK inflation nL8N2Z113E but risk aversion erased those gains, leaving the pound down 0.25% after failing to reach the 21-DMA resistance.
A 50bp BoE rate hike in August remains mostly priced in, but a 50bp gap remains between the BoE and Fed terminal rate hike pricing nL1N2Z114T.
USD/JPY was flat, with both havens bid amid risk aversion and no expectation the BOJ will shift toward a less extremely accommodative policy at Thursday's meeting.
USD/JPY firmed after finding support Tuesday right by the rising 10-DMA, at 137.595, but has so far been unable to turn the later rebound in Treasury yields into clearance of Wednesday and Tuesday's 138.38/39 highs on EBS.
Higher beta currencies were more mixed though USD/CNH gained 0.4% and produced a bullish engulfing daily candle that suggests more tests of this year's recovery highs.
Bitcoin and ether retained some of their recent bullish momentum but gains were minimal given the high level of uncertainty in markets.
Along with the highly anticipated ECB, Nord Stream gas deliveries, Italian politics, U.S. jobless claims and Philly Fed manufacturing data may attract investors' attention on Thursday.
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