Euro clings to US$1.13 as ECB stimulus signal awaited

London

THE euro paused just off three-week lows versus the dollar on Thursday's European Central Bank's meeting, which many hope will signal fresh stimulus for the economy and inject some life into currencies stuck in trading ranges.

The euro/dollar exchange rate has had a very quiet start to 2019 as central banks have rowed back on monetary policy tightening plans in the face of slowing economic momentum. That has suppressed market volatility and left investors struggling to decide on direction.

Analysts said expectations for the ECB to signal the launch of new cheap bank loans had largely been priced in, so focus would be on the bank's economic forecasts and indications for whether it will further delay a rate hike the market expects in mid-2020.

"The market has already priced in a lot. We don't expect the ECB to make any changes but signal that changes are imminent," said Thu Lan Nguyen, a currencies analyst at Commerzbank, referring to the bank's forward guidance on interest rates. "The risks are that the euro gives up a bit more. The risks are to the downside."

The ECB is expected to cut growth forecasts and is likely to provide its strongest signal yet that stimulus is coming in the form of more cheap long-term bank loans. The euro was unchanged at US$1.1308 in early trading. It has traded between US$1.157 and US$1.1234 since November. Euro overnight implied volatility has spiked overnight to its highest since Dec 20.

The dollar, measured against a basket of currencies, stood at 96.875.

"Waiting for the overvalued dollar to reverse course requires patience, and is itself one driver of the lack of FX volatility," Societe Generale strategist Kit Juckes said in a note to clients.

The Canadian and Australian dollars struggled near two-month lows after investors bet their central banks will ease monetary policy in the face of slowing economic momentum. The Aussie hit a fresh two-month low of US$0.70205 after weaker-than-expected retail sales data added to concerns about slowing domestic growth. The Bank of Canada on Wednesday said there was "increased uncertainty" about the timing of future rate hikes, sending the loonie to its lowest since Jan 4, before recovering slightly to C$1.3438 on Thursday.

Sterling stabilised near US$1.3150. Next week sees British lawmakers vote on the Brexit withdrawal deal - while hopes that a disorderly exit will be avoided have buoyed the pound uncertainty has capped those gains.

The Japanese yen and Swiss franc, both currencies that tend to be bought by nervous traders, gained marginally as financial investors turned cautious about the outlook for growth. REUTERS