Categorized | Forex

FOREX-Euro dips after Spain auction, ECB eyed

FOREX-Euro dips after Spain auction, ECB eyed

* Euro falls after Spanish auction yields jump

* ECB expected to keep rates on hold at 1145 GMT

* Markets positioning for dovish Draghi comments

By Nia Williams

LONDON, May 3 (Reuters) – The euro dipped against the dollar on Thursday as a jump in borrowing costs at a Spanish debt auction highlighted market concerns about Madrid’s economic problems, and the shared currency looked vulnerable ahead of a European Central Bank rate decision.

Spain sold 2.5 billion euros of three- and five-year bonds to solid demand, but yields jumped compared with previous auctions. It was the first test of market appetite for Spanish debt since the country slipped into recession and had its credit rating cut.

The euro was last down 0.15 percent at $1.3136, hovering within sight of the 10-day low of $1.3121 hit on Wednesday after weaker-than-expected euro zone manufacturing data and rising unemployment figures.

Immediate support was seen around the 100-day moving average at $1.3118 and the April 23 trough of $1.3103.

“The Spanish bond market remains extremely vulnerable and the stresses facing the Spanish government seem unlikely to disappear soon,” said Jane Foley, currency analyst at Rabobank.

“With the ECB policy meeting there’s some speculation there could be a more dovish tone, but it’s very debatable how the euro should react. Dovish is generally associated with a weaker currency … but it might support investor confidence.”

The ECB is expected to keep rates on hold at 1.0 percent. Market players will be more focused on ECB President Mario Draghi’s news conference at 1230 GMT where he is likely to sound cautious on growth but resist calls to restart the bank’s bond-buying programme to stem rising peripheral debt yields.

“My fear for the ECB is that the market is edging towards Draghi being a bit more dovish but he will not match those expectations and disappoint a bit. People will not be entirely sure how to play that,” said Daragh Maher, currency analyst at HSBC.

While a less dovish-than-expected Draghi and no hints of further liquidity or bond-buying may prompt some market players to buy the euro, other investors could fret that the debt crisis will worsen without the ECB taking action and sell the common currency, Maher said.

ELECTIONS LOOM

Some market players saw an increasing chance of the euro breaking lower ahead of elections in France and Greece at the weekend that could fuel political uncertainty.

A break below the bottom of the roughly $1.30 to $1.35 range that the euro has been in since January would put the common currency on course for a test of the 2012 low around $1.2624.

Pressure on the euro saw the dollar index rise to 79.250, p utting further distance from a two-month trough of 78.603 plumbed on Tuesday.

Against the safe-haven yen, the dollar inched up 0.3 percent to 80.38 yen, holding above Tuesday’s 10-week low of 79.64.

A drop in the dollar below 79.00 yen could prompt short-covering in the yen by longer-term players and spur further declines in the greenback, market players said. Supportive dollar bids were cited in the 79.00-79.50 area, however.

The New Zealand dollar fell after a jump in the local jobless rate prompted markets to price in a small chance of a rate cut this year, a dramatic turnaround from a couple of weeks ago. The market is implying a roughly 40 percent chance of a cut at the Reserve Bank of New Zealand’s next policy meeting.

The New Zealand dollar slid around 1 percent on the day to US$0.8012, a low last seen in late January. Traders reported an options barrier at US$0.8000.

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