Expectations for dovish ECB cap euro gains

London

THE euro remained within its recent trading range against the dollar on Monday, its progress capped by expectations for a dovish European Central Bank meeting next week and after investors turned more bearish on the currency.

Foreign exchange markets were quiet on Monday and volatility low ahead of major central bank policy meetings next week. The Australian dollar - enjoying a boost from encouraging Chinese economic data - was the only real mover.

Money markets have priced in an ECB rate cut of 10 basis points in September and another one in March. The meeting on July 25 may reinforce those expectations.

Investors expect the Federal Reserve to cut its key rate by 25 basis points at the end of July, followed by another cut in September. Forecasts for dovish moves by both central banks have kept euro/dollar stuck in a narrow range for weeks.

The euro was up 0.08% at US$1.1281, still within the recent range of US$1.14 to US$1.11.

An index that tracks the dollar against a basket of six other major currencies was flat at 96.761.

Investors are more bearish on the euro, since Treasury yields look set to remain among the highest in developed markets despite future Fed rate cuts, analysts say.

However, the euro "should recover somewhat as it looks to me like the eurozone economy and expectations are bottoming", said Marshall Gittler, chief strategist at ACLS Global.

Speculators added to their short positions against the euro in the week to July 9, according to US Commodity Futures Trading Commission data. Leveraged funds extended their net long dollar positions for the first time in seven weeks.

Some analysts are surprised the euro is not gaining as the market prices in Fed easing. "For the world's most-traded and least-exciting currency pair, a dovish Fed, a weak-dollar President and a hint of global economic optimism, 'ought' to mean EUR/USD rallies. If it can't stage a move back to 1.14 in the next week or two, what on earth could make it rally?" said Kit Juckes, FX strategist at Societe Generale.

Elsewhere, the Australian dollar reached a 10-day high on stronger- than-expected economic data from China, which some analysts saw as signalling that moves to revive spending in the world's second-biggest economy are working.

China's industrial output rebounded in June from a 17-year low in May. June retail sales surged 9.8 per cent from a year earlier. REUTERS