Euro seen facing headwind ahead of ECB

Dated Posted: 2011-09-08

TOKYO, Sept 8  - The euro held on to slim gains on relief a German court backed the country's involvement with euro zone bailouts, though the currency is likely to continue to face headwinds from suspicions that Europe's efforts to fix its debt crisis may be falling behind.

The euro could take a hit if European Central Bank President Jean-Claude Trichet sounds cautious about the ECB's buying of Italian and Spanish bonds, though any selling of the common currency could be limited ahead of U.S. Federal Reserve Chairman Ben Bernanke's speech later in the day.

The euro traded at $1.4083 , little changed from late U.S. levels but about a full cent above a seven-week low of $1.3972 hit on Monday, having managed to recover above its 200-day moving average around $1.4015.

Major resistance is seen at around $1.4200, the 38.2 retracement of its fall from late August to early September.

The euro fetched 1.2090 franc , above the minimum exchange rate the Swiss central bank imposed on Monday but off a two-month high of 1.22 marked on Monday right after the central bank's announcement.

"The euro/Swiss is virtually pegged so it's a bit difficult to play on that. But I guess there will be a lot of fishy stories out or Europe. The best idea is to sell it on a rally, perhaps around $1.4150 in the euro/dollar," said a trader at a Japanese brokerage.

The single currency rallied to as high as $1.41504 on Wednesday after the German Constitutional Court backed the country's role in euro zone bailouts, taking some of the edge off investors' deep fear over the euro zone's debt crisis and helping to boost share prices around the globe.

The Italian Senate on Wednesday approved the government's austerity program aimed at balancing the budget in 2013 and the plan, which has been radically overhauled on several occasions under pressure from the ECB and the European Union, now passes to the Chamber of Deputies, where Prime Minister Berlusconi has a slimmer but still stable majority.

The immediate focus is on the ECB, which is expected to signal a change in policy direction by halting an interest-rate rise cycle just five months after it started as the euro zone debt crisis weighs on the economy. But the ECB is internally divided over its bond buying to curb rises in credit spreads of southern European and Irish bonds.

"If Trichet makes cautious remarks on bond buying, Italian and Spanish spreads could rise again and hurt investor sentiment," said Junya Tanase, chief strategist at JPMorgan Chase.

HOLD FIRE

In Europe, the Bank of England also holds a rate meeting, though it is expected to hold fire as inflation is stubbornly high despite a faltering recovery in the UK economy.

On the other hand, many market players expect the U.S. central bank chief to drop more hints that the Fed will adopt further easing steps in his speech due at 1730 GMT, hampering the dollar.

The greenback stood at 77.31 yen and is seen stuck around that level as selling from Japanese exporters is seen capping the pair, likely below 77.50 yen in Thursday' Asian trade, while wariness about Japanese intervention is supporting the dollar.

The Australian dollar last traded at $1.0650 , having gained 1.5 percent on Tuesday. Focus is on Australian jobs data at 0130GMT with expectations of 11,000 jobs being added and of the jobless rate steady at 5.1 pct.

Anything weaker could see the Aussie retreat again and could prompt money market futures to price in a bigger chance of rate cuts despite robust growth so far in the Australian economy.

 

Reuters