FOREX-Euro steady but vulnerable to gloomy ECB outlook

Thu Dec 6, 2012 6:36pm IST

* Euro steady against dollar but off recent highs
    * ECB holds rates, focus on news conference at 1330 GMT
    * ECB seen cutting growth forecasts, may weigh on euro
    * German industrial orders unexpectedly jump

    By Jessica Mortimer
    LONDON, Dec 5 (Reuters) - The euro was steady against the
dollar on Thursday but seen vulnerable to any hint of further
interest rate cuts from the European Central Bank at its regular
post-policy meeting news conference.
    The ECB kept interest rates on hold, but this was widely
expected and the euro showed little reaction. It was last
steady at $1.3065, having retreated from Wednesday's seven-week
high of $1.3127. 
    Investors turned their attention to a news conference by the
bank's president Mario Draghi at 1330 GMT. 
    Analysts said any hint interest rates could be cut next year
would see the euro fall, potentially towards this week's low of
$1.2973. The euro traded well below a reported option barrier at
$1.3150. 
    "The market is wondering if the ECB will hint at a rate cut
to come, and if it does this could point to a weaker euro. But
the euro is still in rally mode until it gets back below $1.30,"
said John Hardy, currency strategist at Saxo Bank.
    He said rising Spanish and Italian borrowing costs,
following weak demand at an auction of Spanish debt on
Wednesday, were also weighing on the euro. 
    But some traders said Draghi may be careful to avoid being
too negative and could give the euro a slight lift by
highlighting recent falls in peripheral euro zone bond yields in
the wake of the ECB's pledge to buy the bonds of indebted
countries.
    "I expect Draghi to be slightly optimistic in his tone,
emphasising soft data improving, peripheral spreads tightening
and the success of the OMT plan," said Amit Patel, a trader at
currency hedge fund Sharpe + Sigma, which has assets under
management of $80 million. 
    "So the euro will tick higher, but most of this is already
in the price. I'd expect any rally to meet decent sell interest
in the $1.3120/50 zone." 
    Tempering some of the recent worries about the euro zone
economy, data on Thursday showed German industrial orders rose
far more than expected in October due to strong demand from
abroad, especially from outside the euro zone. 
    
    EURO OUTLOOK       
    A Reuters poll of economists suggested the euro will
probably hold its ground against the dollar over the next month,
although a persistently weak euro zone economy could drag it
lower in 2013. 
    "Confirmation that the euro zone remains in recession is
certainly not providing any underlying support for the euro,"
said Jeremy Stretch, head of currency strategy at CIBC World
Markets. 
    Concerns about the U.S. fiscal debate also tempered any
euro's gains, as it tends to weaken in times of uncertainty.
There was little sign of progress in the talks, aimed at
avoiding the "fiscal cliff", on Wednesday..
    The euro slipped by 0.15 percent  to 107.63 yen,
off a 7-1/2 month high of 107.95 yen hit on Wednesday.
    The dollar also fell 0.15 percent to 82.35 yen, but
it was still not far from an eight-month high of 82.84 yen hit
on Nov. 22.
    The yen was seen staying weak due to expectations of
pressure on the Bank of Japan to ease monetary policy following
an election on Dec. 16.
    Elsewhere. the Australian dollar rose 0.4 percent
on the day to a 2-1/2 month high of $1.0497, buoyed as
surprisingly strong Australian jobs data prompted investors to
reduce expectations of further policy easing.
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