Categorized | Forex

FOREX-Euro supported, but risk of ECB disappointment high

FOREX-Euro supported, but risk of ECB disappointment high

* Expectations of ECB action this week to support euro
* China manufacturing data disappoints
* Aussie at 6-week low after weak data

By Anirban Nag
LONDON, Sept 3 (Reuters) – The euro was steady against the
dollar on Monday, drawing support from expectations the European
Central Bank will take bold steps this week to stem the debt
crisis, although flagging growth prospects were likely to limit
gains.
The growth-linked Australian dollar fell to fresh six-week
lows against both the dollar and the yen as investors sold up
amid more signs of weakness in the Chinese economy and a set of
weak Australian data.
The euro stood at $1.2575, flat from levels in late
U.S. trade and off an eight-week peak of $1.2638 set on Friday
after Federal Reserve chief Ben Bernanke’s speech fanned
expectations of further stimulus to revive growth. Traders cited
reported option barriers at $1.2650, with decent resistance at
the July 2 high of $1.2681.
The euro has also been underpinned by expectations the ECB
will soon unveil a bond buying programme, probably at its policy
meeting on Thursday, aimed at lowering borrowing costs for
peripheral euro zone countries like Spain and Italy.
That is expected to lower the risk premia – or the
additional cost over low-risk securities – on holding European
assets as well as the euro.
“While the euro could rally to the $1.2670/80 region as
short positions are trimmed, we are likely to see investors sell
into it as there is a great of deal of uncertainty about what
the ECB may announce on Thursday,” said Jeremy Stretch, head of
currency strategy at CIBC World Markets.
“Along with bond-buying plans there will be updates on
growth and inflation. So there is a risk of disappointment.”
The ECB is likely to downgrade growth forecasts this week
and this would build pressure on it to lower interest rates in
coming months. Data on Monday showed German and French factory
activity contracted in August.
ECB President Mario Draghi skipped last week’s Jackson Hole
symposium to try to smooth over a deep rift within the ECB over
the bond scheme that is increasingly being played out in public.

Despite the differences within the bank, investors hope
Draghi will prevail over German opposition to the programme.
Reflecting such views, speculators have been cautiously trimming
pessimistic positions on the euro over the past several weeks.
Data from the U.S. financial watchdog showed on Friday that
speculators have cut their bets against the euro to the smallest
since April.

FED EASING PROSPECTS
The dollar was under pressure against the yen following
Bernanke’s speech. It last stood at 78.36 yen, near the
three-week low of 78.187 hit on Friday.
Bernanke said high unemployment is a grave concern and that
the Fed would act as needed to strengthen the recovery, though
he did not explicitly signal an imminent move, providing
temporary relief to the U.S. dollar.
“The dollar may be supported by likely buying from Japanese
importers in the near term. But I do think it will test 78 yen,”
said Takahiro Suzuki, vice president of forex at Nomura
Securities.
A weaker-than-expected U.S. jobs report this Friday could
bolster expectations of a looser U.S. monetary policy and weigh
on the dollar in the run-up to the Fed’s policy meeting on Sept
12-13, traders said.
San Francisco Federal Reserve Bank President John Williams,
known as a policy dove and a voter this year on Fed policy,
called for a round of bond purchases that could eventually top
$600 billion.
The Australian currency fell to a near six-week low against
the U.S. dollar, hit by a double whammy of weak Chinese and poor
domestic data. The Aussie slid to a low of $1.0240,
retreating from Friday’s high of $1.0355.
A report showing China’s manufacturing sector slowed further
in July and a weak reading in Australian retail sales added to
worries that the Australian economy may be losing momentum from
the mining boom spurred by Chinese demand.

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