The euro drifted in a narrow range on Tuesday as simmering geopolitical tensions put investors off adding big bets before a European Central Bank meeting this week when policymakers might voice some concerns about the single currency’s strength.
While ECB officials have been very careful about expressing their concerns over the currency’s rise this year, as the euro still remains broadly below levels obtaining when policymakers launched their monetary stimulus plans, there are some markets fears that that may change.
That has kept markets trading in narrow ranges with some large option strikes around current levels also keeping trading rangebound.
“While geopolitical risks have intensified over the last few days, the outlook for the overall eurozone economy has improved noticeably and that has led to some institutional investors becoming bullish about euro area assets,” said Manuel Oliveri, an FX strategist at Credit Agricole in London.
The euro edged 0.1 percent higher to $1.1905, rising for a second day with most currencies trading in tight overnight ranges as tensions over North Korea remained high.
The single currency has gained more than 13 percent against the dollar this year and is up more than 5 percent on a trade-weighted index calculated by the ECB since April.
“Any attempt to jawbone the currency lower by the ECB will be limited in its impact as the broader market expects policymakers to stick to their plan of gradually unwinding its policy stimulus,” said Peter Rosenstreich, head of market strategy at Swissquote Bank in Switzerland.
Despite those chunky gains and the large swings in favor of the euro in latest positioning data, analysts say that any pushback from ECB policymakers at their meeting on Thursday would have a limited impact.
JP Morgan strategists estimate that a halving of the outstanding long euro positions in the currency market — a very low probability event — would only trigger a 2 percent drop in the euro.
Political tensions kept the dollar on the back foot against the yen and the Swiss franc.
North Korea has been observed moving what appeared to be an intercontinental ballistic missile towards its west coast, South Korea’s Asia Business Daily reported on Tuesday, citing an unidentified intelligence source.
The dollar’s index against a basket of six major currencies slipped 0.15 percent to 92.508.