FOREX-Euro hunkers down before Fed decision

by on July 31, 2012 11:25 pm BST

Tue Jul 31, 2012 7:25pm EDT

* Currency markets subdued as event risks loom

* Fed decision on Wednesday, ECB on Thursday in focus

* China PMI to feature during Asian session

By Ian Chua

SYDNEY, Aug 1 (Reuters) – The G3 currencies were expected to
mark time in Asia on Wednesday, following another listless
offshore session as the Federal Reserve policy decision loomed,
a day ahead of the European Central Bank’s own meeting.

But China’s official manufacturing PMI, due around 0100 GMT,
could add a bit of spice to local trading, with markets looking
for signs the world’s second-largest economy is stabilising
thanks to increased policy support.

Any disappointment there would add to nerves in a market
already growing doubtful that both the Fed and ECB will do
enough to spur their respective economies.

The euro was at $1.2294, having traded in an
inside-day $1.2249/2331 range on Tuesday that suggested no
conviction in the market. It was equally subdued on the yen at
96.04, after drifting in a slim 95.75-96.28 range on

Investors, however, took a bit of profit on high-beta
currencies like the Australian dollar, knocking it down to
$1.0488 from off a four-month peak of $1.0538.

The Aussie also retreated from a record high versus the
euro, which rose to A$1.1718 from a trough around

Traders said many of the moves were due to month-end flows
as well as positioning ahead of the key event risks.

Due at 1415 GMT, the U.S. central bank is widely expected to
stand pat on rates for now, although some diehard optimists
believe it will lay out the groundwork for further bond
purchases in order to spur a sluggish economic recovery.

“We are looking for, at most, a chance in the Fed’s language
that extends low rates through at least early-2015, which won’t
be the stimulus bump market participants have been hoping for.
Nonetheless, investors are largely mixed on what they feel the
Fed will do going forward,” said Christopher Vecchio, currency
analyst at DailyFX.

With the euro undecided, the dollar index also put in
an unimpressive performance, trading between 82.505 and 82.888,
hovering above a three-week trough of 82.343 set late last week.

Against the yen, the greenback bought 78.12, still
trapped in a 78.00-78.70 range seen in the past week.

On Thursday, the ECB will get its turn in the sun, although
market enthusiasm for big action has already dissipated somewhat
amid continued objection from Germany.

Germany’s finance ministry reiterated its view on Tuesday
that there is no need to grant a banking licence to the euro
zone’s new bailout fund, a move that could enable it to buy
virtually unlimited amounts of debt issued by troubled euro zone

Euro zone data on Tuesday continued to paint a dire picture
for a region desperately in need of fresh stimulus from
policymakers. Joblessness in the euro zone has hit its highest
level since the single currency was born.

“Given that EUR short positions are stretched, we view that
the EURUSD and EUR crosses remain prone to upside risks on
potential headlines from ECB/Bundesbank/eurozone politicians
ahead of the ECB’s meeting on Thursday,” analysts at BNP Paribas
wrote in a client note.