Euro's gains held back by caution over ECB meeting

London

THE EURO struggled to stay in positive territory on Thursday after the European Central Bank stuck to its monetary policy stance, with traders worried that the central bank's president would signal growing pessimism about economic growth.

The ECB formally ended its vast bond purchase scheme and kept interest rates on hold, as expected.

But the focus will be on ECB president Mario Draghi's news conference at 1330 GMT, and his expectations for growth and inflation at a time when the global economy may be slowing, as well as any signals on an interest rate rise in late 2019.

"Our base case is that they stick to their script (maintaining their growth and inflation forecasts), but if they don't, it will weigh on the euro," said Jane Foley, a currencies strategist at Rabobank.

Those concerns about ECB caution meant Italy's announcement that it would cut its budget deficit target, which may defuse a months-long row with European Union officials, did not boost the euro much in Thursday trading earlier.

The euro traded up 0.1 per cent at US$1.1389 immediately after the ECB announcement but then traded down to US$1.1367, unchanged on the day.

The single currency has largely traded in a US$1.16-US$1.12 range since August, particularly after the dollar's eight-month rally slowed on signs that the Federal Reserve will stop raising rates sooner than previously expected.

Alvin Tan, a strategist at Societe Generale, predicts euro/dollar will remain in a tight range into 2019.

"On the one hand, US growth is slowing. On the other, we have a situation where European political risk remains large and a cautious ECB," he said. Against a basket of its rivals, the dollar index slipped 0.1 per cent 96.969 before recovering.

Signs of easing Sino-US trade tensions and expectations that China will increase support for its cooling economy helped broader market sentiment on Thursday.

That spilled into currencies, with the Australian dollar - a barometer of China's economic fortunes - gaining 0.2 per cent to US$0.7235.

Elsewhere, sterling remained the big story after British Prime Minister Theresa May fought off a bid to unseat her by colleagues unhappy with her Brexit plans.

Mrs May returns to Brussels on Thursday for help in trying to sell a tweaked version of her much-criticised Brexit agreement to unhappy colleagues. Sterling was up 0.4 per cent to US$1.2687 before settling around US$1.2650.

The yen shed 0.2 per cent to 113.46 and 0.2 per cent versus the euro to 129.01 yen.

China's offshore yuan dipped 0.2 per cent to 6.8780 as traders questioned whether Washington and Beijing would be able to calm tensions in their trade war. REUTERS