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Post-Brexit Euro rally blocked on bets ECB has bias for stimulus

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Add the European Central Bank to reasons the euro is struggling since the UK's referendum last month.

[NEW YORK] Add the European Central Bank to reasons the euro is struggling since the UK's referendum last month.

The 19-nation shared currency has traded in a tight range after plunging with the pound in reaction to the June 23 Brexit decision to leave the European Union. When the ECB meets next week, traders are expecting policy makers to maintain a stimulative bias, as any rally in the euro could sink the already feeble growth outlook on the continent.

"They definitely would dislike a sustained currency appreciation," said Valentin Marinov, head of Group-of-10 currency strategy at Credit Agricole SA's corporate and investment bank unit in London.

"The expectation is still there that if economic conditions in the euro zone will deteriorate from here, ultimately that should work to potentially increase the chances of further easing by the ECB and ultimately punish the euro."

The fallout from Brexit is forecast to shave gross domestic product in the euro area next year and in 2018, resulting in about 59 billion euros (S$87.7 billion) of lost output, according to economists in a Bloomberg News survey.

In the event of an unexpected global shock, the euro's reputation as a haven could spur demand, upending the central bank's growth and inflation forecasts.

The euro fell Friday after reports that Turkey's army said it seized power in the country as warplanes flew over the capital and tanks blocked roads in Istanbul. Prime Minister Binali Yildirim said his government is still in control and will resist.

The common currency dropped 0.1 per cent this week to US$1.1035. It gained 4.1 per cent to 115.69 yen.

Hedge funds and other large speculators in the futures market increased net bets for a weaker euro to the most since January, according to the Commodity Futures Trading Commission. Bets that the currency will fall outnumbered bearish wagers by 87,660 in the week ending July 12, up from 75,327 contracts in the previous week.

The euro is projected to weaken to US$1.08 by the end of the third quarter, according to the median estimate in a Bloomberg survey of analysts.

ECB President Mario Draghi and his colleagues will need to decide what to do with a bond-buying plan that is already set to exceed 1.7 trillion euro and run until March.

After that they have two options: Extending the deadline at the current pace of 80 billion euros a month or gradually winding down, or tapering, purchases.

Inflation in the euro area continues to be "too low" and the ECB's "key objective is to ensure it reaches its goal of just below 2 per cent," ECB Governing Council member Luis Maria Linde said July 12.