EUR/AUD scales 8-week peak, ECB policy call eyed

The EUR/AUD currency pair rose to a fresh 8-week high of 1.6502 on Thursday ahead of the outcome of the European Central Bank’s policy meeting.

The ECB is largely expected to raise its main refinancing operations rate by 25 basis points to 2.40% at its June 11th meeting.

And, the ECB deposit facility rate is expected to be raised to 2.25%.

This move would make the central bank the first among its major peers to tighten policy in reaction to a surge in energy prices linked to the conflict in the Middle East.

ECB Executive Board member Isabel Schnabel had said that the central bank should move ahead with an interest rate hike in June, even if US peace talks with Iran are successful. She highlighted that the conflict had lasted significantly longer than anticipated and that elevated energy prices were increasingly affecting the wider economy.

And, ECB policy maker Francois Villeroy de Galhau again underscored that the central bank “will do what is necessary” to ensure inflation remains in line with its target.

Any signals of a more aggressive tightening path or firm anti-inflation stance from ECB officials could offer additional near-term support to the Euro.

At the same time, geopolitical tensions in the Middle East have intensified, weighing on the risk-sensitive Australian Dollar. The US military launched a new wave of strikes on targets across Iran after President Donald Trump said that more were coming.

In turn, Iran announced the closure of the Strait of Hormuz and warned that its armed forces would give a crushing and decisive response to any aggression from the US in the region.

On the domestic front, the Australian Dollar is also facing a headwind from shifting expectations around the Reserve Bank of Australia’s policy path. Diminishing odds of additional RBA rate hikes are likely to discourage aggressive bullish positioning in AUD.

The EUR/AUD currency pair was last down 0.01% on the day to trade at 1.6480.