FOREX-Euro extends gains in choppy trade, U.S. GDP awaited

by on July 27, 2012 11:52 am GMT

Fri Jul 27, 2012 7:52am EDT

* Bundesbank position leads to euro sell-off

* Le Monde report suggests intervention in bond markets

* Traders awaiting U.S. Q2 GDP data

By Anirban Nag

LONDON, July 27 (Reuters) – The euro rose in choppy trade on
Friday, extending gains on expectations that the European
Central Bank and euro zone governments will take bold measures
to tackle the sovereign debt crisis.

The euro rose on Thursday to a two-week high of $1.2330
after a pledge by ECB President Mario Draghi to do
whatever it took within the bank’s mandate to preserve the euro.

Analysts said Draghi’s comments sent a strong signal that
the ECB could take steps to rein in soaring Spanish and Italian
borrowing costs, though a lack of details might limit euro

The bank, which meets next week to decide on interest rates
and discuss policy measures, has previously bought government
bonds in the secondary market to push yields lower.

French newspaper Le Monde that the ECB and euro zone
governments were preparing co-ordinated action, with traders
noting that support from Berlin and the Bundesbank was vital for
the euro to sustain gains.

“Its all very headline-driven at the moment, but what it
tells you is that the market is looking to next week’s (ECB)
meeting with some degree of anticipation,” said Sara Yates,
currency strategist at Barclays.

“While this will keep the euro supported, unless there is no
German opposition to these plans it will not be a game changer.”

The euro was up 0.1 percent at $1.2300, off a session low of
$1.2241 on trading platform EBS struck after the German central
bank said it remained critical of the ECB’s bond-buying
programme and reiterated its opposition to giving a banking
licence to the euro zone’s bailout fund.

Traders cited offers to sell the euro at $1.2320/30 with
stop-loss orders above $1.2350.

The ECB earlier this month cut interest rates to support
economic growth, but pressure is building on it to do more given
peripheral euro zone governments are struggling to implement
tough austerity measures.

The ECB has bought 211.5 billion euros worth of government
debt since its stalled bond-buying programme began in May 2010.
Analysts said that purchases between August and December last
year had initially lowered borrowing costs but long-term yields
began climbing again in November, putting pressure on the euro.

“I can’t imagine Draghi would have made his comments without
some sort of nod that temporary measures could be made, but this
does not add up to solving the euro zone’s problems, so I think
the peak has already been seen,” said Neil Mellor, currency
strategist at Bank of New York Mellon.

As such, skittish investors will be watching the ECB meeting
next Thursday to see if the central bank follows up Draghi’s
words with actions.


The market’s focus now turns to U.S. economic output data to
be released at 1230 GMT. The median of forecasts from analysts
polled by Reuters is for growth of 1.5 percent in the second
quarter, down from the first-quarter’s 1.9 percent.

Strategists said a weaker-than-expected figure may raise
expectations that the Federal Reserve could adopt further
monetary easing at its meeting next week, potentially sending
the euro back above $1.23. A stronger figure, meanwhile,
wouldn’t necessarily strengthen the dollar.

“The data has been on the softer side, so we are expecting a
rather subdued reading of the GDP numbers,” said Chris Walker
currency strategist at UBS. “At the margin that could weigh on
the dollar and may raise expectations of further easing by the
Fed, but we are not calling for that as yet.”

While many are not expecting the Fed to move immediately, it
may eventually opt for a third round of quantitative easing in
the form of large-scale bond purchases, known as QE3, or cut the
interest rate it pays banks on the excess reserves they leave
with the central bank.

The dollar was slightly lower against the yen,
trading at 78.12 yen with stops cited below 77.90. The euro was
flat against the yen, trading at 96.05, above a
12-year low of 94.12 touched on Tuesday.

Better risk appetite helped the Australian dollar to a
three-month high against the U.S. dollar of $1.0447.
Traders cited option barriers at $1.0450.