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FOREX-Euro falters but drop contained on ECB hopes

by on July 30, 2012 5:50 am GMT
 

Mon Jul 30, 2012 1:50am EDT

* Euro pulls back from three-week high hit on Friday

* Failure to achieve weekly reversal weighs on euro -analyst

* Hopes of ECB action this week underpin sentiment

By Masayuki Kitano

SINGAPORE, July 30 (Reuters) – The euro slipped on Monday as
short-term technical charts flashed a bearish signal, but its
losses were limited by hopes the European Central Bank will soon
launch fresh action to tackle the euro zone’s debt crisis.

The single currency’s downside was likely to be limited
ahead of an ECB policy meeting on Thursday, with the focus on
whether it will reactivate its bond-buying programme to help cut
Spanish and Italian borrowing costs.

The euro shed 0.3 percent to $1.2293, retreating from
a three-week high of $1.2390 hit on Friday, but still holding
more than two cents above a two-year low of $1.2042 hit last
Tuesday on trading platform EBS.

Its failure on Friday to close above a key technical level
near $1.2325 was weighing on the single currency for now, said
Callum Henderson, global head of FX research for Standard
Chartered Bank in Singapore.

“That was a short-term bearish signal on the charts,” he
said, adding that the single currency had failed to form a key
reversal pattern on weekly charts.

Still, the single currency’s downside could be limited in
the next few days, Henderson said, adding that the euro would
probably stay range-bound until the ECB meeting.

“Clearly, if nothing is announced that would be a massive
disappointment… But there is an expectation that we’re going
to see something meaningful on Thursday,” he said.

ECB President Mario Draghi pledged last week to do whatever
was necessary to protect the euro zone from collapse, spawning
hopes that the ECB would act to lower borrowing costs for highly
indebted member countries such as Spain and Italy.

But highlighting resistance against such a move, German
Economy Minister Philipp Roesler warned the ECB about any
large-scale government bond purchases.

Analysts say ECB bond-buying by itself will not resolve the
fiscal issues of indebted countries like Spain, and is unlikely
to change the euro’s weak overall trend.

Such action, however, could spur more short-covering in the
euro in the near-term, they say.

OPPORTUNITY TO SELL?

The euro might initially rise to around $1.25 and 100 yen if
the ECB resumes bond purchases, said Daisuke Karakama, market
economist for Mizuho Corporate Bank in Tokyo.

“But I think that should be seen as a golden opportunity to
sell into a rally, a chance to sell that the ECB will have
helped set the stage for,” Karakama said.

“Unless progress is made toward fiscal consolidation in
Spain, the SMP won’t make everything okay,” Karakama said,
referring to the ECB’s bond buying programme, known as the
Securities Markets Programme (SMP).

The euro fell 0.4 percent to 96.31 yen but
remained above last week’s low of 94.12 yen, its lowest level
against the Japanese currency in more than 11-1/2 years.

Among the biggest beneficiaries of the recent improvement in
risk sentiment are so-called high-beta currencies such as the
Australian dollar, which are particularly sensitive to shifts in
investor risk appetite and market expectations for global
economic growth.

The Aussie reached a four-month high around $1.0498
in early Asian trade on Monday. It last stood at $1.0465, down
0.1 percent from late U.S. trade on Friday.

A clear break of the psychologically key $1.0500 level will
open up the way to $1.0556, a level representing the 76.4
percent retracement of the late February to early June fall.

Over the past few days, investors have shunned the dollar
and the yen, safe-havens usually bought in times of heightened
market stress. The dollar wallowed near a three-week trough
against a basket of major currencies.

Against the yen, the dollar eased 0.1 percent to 78.35 yen
.

Markets will also be keeping an eye on U.S. Treasury
Secretary Timothy Geithner, who will meet German Finance
Minister Wolfgang Schaeuble and Draghi on Monday.

The U.S. Treasury said Geithner and the officials will
discuss the U.S., European and global economies.