Euro edges higher, but outlook stays bleak as ECB easing in focus

NEW YORK (Reuters) - The euro bounced up on Thursday off a two-month low against the dollar, as investors bought the single currency after the European Central Bank failed to deliver an expected rate cut, while ECB President Mario Draghi offered optimism on the euro zone economy.

FILE PHOTO: Euro currency bills are pictured at the Croatian National Bank in Zagreb, Croatia, May 21, 2019. REUTERS/Antonio Bronic

Investors had priced in more than a 50% chance of an interest rate cut prior to Thursday’s ECB meeting. After the ECB kept rates unchanged, the euro recovered from lows.

The bank’s statement said rates would stay “at their present or lower levels.” The common currency’s outlook remained downbeat due to the prospect of further monetary easing.

“I think the market had fairly dovish expectations going into the ECB meeting and some in the market had priced in a cut,” said Mazen Issa, senior FX strategist, at TD Securities in New York. The actual decision was a signal to cover shorts on the euro, he added.

“Now the question was: how dovish would Draghi be at his briefing? While he was pretty dovish, there were some positive elements as well,” Issa said.

Draghi, at his press briefing, said he saw low risk of recession in the euro zone, but noted that a rebound in the second half was less likely.

Rabobank in a research note said Draghi did not live up to expectation that he would be more specific about whether to institute a new asset purchase program. Draghi said there had been no discussion yet on policy tools.

“This suggests that while today’s actions may have been supported by a broad consensus, the discussion in September on the actual easing package to be implemented may reveal more division in the Council. Clearly, not everyone is on the same page here,” Rabobank said.

In afternoon trading, the euro was up 0.1% at $1.1146 EUR=. Earlier, it dropped to a two-month low of $1.1102 after a bleak German Ifo business sentiment survey for July.

The euro also rose 0.7% against the Swiss franc to 1.1046 francs EURCHF=, and was up 0.5% versus the yen at 121.217yen EURJPY=.

The dollar index was up 0.1% at 97.813 .DXY, led by gains against the yen. The greenback rose rising 0.5% to 108.71 yen JPY= after a batch of generally positive U.S. economic data.

New orders for key U.S.-made capital goods surged 1.9% in June, while weekly jobless claims declined to 206,000.

“The strong data suggested any rate cuts by the Fed would be the modest insurance variety and not the start of a full-blown easing cycle,” said Joe Manimbo, senior market analyst, at Western Union Business Solutions in Washington.

The Federal Reserve’s monetary policy meeting is scheduled next week, and investors are widely expecting an interest rate cut.

Reporting by Gertrude Chavez-Dreyfuss; Editing by Susan Thomas and David Gregorio