FOREX-Euro extends gains in choppy trade, U.S. GDP awaited
* 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 gains.
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.
- Tweet this
- Share this
- Digg this