|13 December, 2018

FOREX-Euro's gains held back by caution over ECB meeting

Euro's gains held back by caution over ECB meeting

Image used for illustrative purpose. 20 Euro banknotes are seen in a picture illustration, August 1, 2016.

Image used for illustrative purpose. 20 Euro banknotes are seen in a picture illustration, August 1, 2016.

REUTERS/Regis Duvignau

LONDON- The euro nudged higher on Thursday after Italy moved to defuse a budget row with the European Union, although the gains were limited by traders positioning for possible European Central Bank pessimism on economic growth.

The ECB, which publishes its monetary policy decision at 1245 GMT, is expected to announce formally an end to its quantitative easing scheme. 

The focus will be on ECB President Mario Draghi's subsequent press conference and whether the ECB will trim expectations for and inflation, as well as any signals on an interest rate rise in late 2019.

Media reports suggesting the ECB will lower its inflation outlook mean it "may not be reading off the same scoresheet that it previously had," said Jane Foley, a currencies strategist at Rabobank.

"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," she added.

Those concerns meant that Italy's pledging to cut its deficit target did not boost the euro much. 

The euro traded up 0.1 percent at $1.1377 after earlier hitting $1.1394. It has largely traded in a $1.16-$1.12 range since August, particularly after the dollar's eight-month rally slowed on signs 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, U.S. 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 percent 96.969.

Signs of easing Sino-U.S. 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 percent to $0.7235 AUD= .

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

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 percent to $1.2687 GBP= before settling around $1.2650. 

The Swiss National Bank kept its ultra-loose monetary policy in place at a policy meeting. The franc was little changed.

Norway's central bank also kept rates on hold but reiterated its plans for a March increase, sending the crown up as much as half a percent versus the euro and the dollar. 

The yen shed 0.2 percent to 113.455 and 0.3 percent versus the euro to 129.10 yen.

China's offshore yuan dipped 0.1 percent to 6.8775 as traders questioned whether Washington and Beijing will be able to calm tensions in their trade war.

(Editing by Larry King)

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