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Euro pinned near recent lows as attention shifts to Fed

London

THE euro struggled to make headway against a resilient dollar on Wednesday while foreign exchange markets remained largely calm ahead of a crucial meeting of central bankers later this week.

After markets rushed over the last two months to price in significant easing from central banks in the United States and Europe, the outlook for euro/dollar will depend largely on whether or not policymakers live up to those expectations.

Officials from major central banks will gather at Jackson Hole, Wyoming, on Friday with markets focused on a scheduled speech by US Federal Reserve chair Jerome Powell.

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The speech comes after last week's inversion of the US yield curve - widely regarded as a recession signal - boosted expectations that the Fed would cut interest rates again at its September policy meeting.

"In the big scheme of things, markets are relatively range-bound, with the focus on Jackson Hole later this week," said Manuel Oliveri, a strategist at Credit Agricole.

The euro weakened marginally to US$1.1097. The single currency has moved little since Italy's Prime Minister Giuseppe Conte resigned on Tuesday, as some investors believed the move made a snap general election less likely.

The dollar, measured against a basket of currencies, edged higher to 98.228. Mr Oliveri expects the euro to strengthen towards US$1.12 by September, even though the European Central Bank will struggle to exceed investor expectations for cutting rates. Talk of more fiscal spending in Germany, and the hit to the US yield advantage from falling interest rates, should support the euro, he added. "Fiscal stimulus is a positive for the currency," he said.

The dollar has also been supported by talk of more spending - US President Donald Trump said on Tuesday that his administration was considering potential tax cuts on wages as well as profits from asset sales.

Elsewhere, sterling was the big focus as British Prime Minister Boris Johnson heads to Berlin to meet Chancellor Angela Merkel for talks over Brexit.

The pound briefly jumped on Tuesday after Mrs Merkel raised the possibility of practical solutions to the so-called backstop - an insurance policy for the Irish border after Brexit - which London opposes, but also reiterated that the EU would not reopen the Withdrawal Agreement on Britain's exit from the EU.

Analysts say the pound is vulnerable should any positive noises emerge from Mr Johnson's meeting with Mrs Merkel after investors this month ramped up their bets against the currency.

Sterling was last down 0.4 per cent at US$1.2126 and 0.4 per cent lower versus the euro at 91.52 pence.

The dollar rose against the yen, rising 0.2 to 106.48 and further away from the seven-month high of 105.05 the Japanese currency hit last week. REUTERS