FOREX-Euro gains prove short-lived before ECB meeting

* Upward revision to PMI data lifts euro vs dollar
* Investors still wary of ECB, Italian political situation
* Yen strengthens after BOJ confirmation hearings

By Anooja Debnath
LONDON, March 5 (Reuters) - Slightly better-than-expected
euro zone data helped the euro firm against the dollar on
Tuesday but it had pared some early gains by midday as investors
weighed the chances the ECB will cut interest rates this week.
Euro weakness is seen persisting as the currency bloc's
economy continues to falter, raising the risk the European
Central Bank will ease policy in coming months.
The euro was up 0.1 percent at $1.3035, giving up
some gains made earlier, with reported selling by macro hedge
funds. It had hit a session high of $1.30755 after a euro zone
composite PMI survey came in at 47.9, marginally better than the
preliminary reading of 47.3.
The index remained well below the 50 mark dividing growth
from contraction, however, and dipped from the previous month.
Euro zone retail sales data also beat expectations and provided
a slight boost to the single currency.
"The (PMI) data did not have a lasting effect on the euro,
because what counts in the end is what the ECB makes of these
numbers as it determines their growth outlook and how likely a
rate cut will be," said Ulrich Leuchtmann, head of FX research
at Commerzbank.
"If we don't get a massively positive number that makes the
ECB rethink their forecasts then everything that comes out now
isn't of much importance."
The euro has been unable to make decisive rebounds as
sellers emerged at higher levels, and option expiries at $1.3025
and $1.3050 could keep the currency pinned around these levels.
Technical charts showed resistance at the 100-day moving average
at $1.31276.
"Even if the ECB does not surprise already dovish
expectations, we still have the risk of further deterioration in
data bringing forward bets of further cuts as soon as April."
said Valentin Marinov, head of European G10 FX strategy at Citi.
The euro has also been hurt by political concerns in Italy.
Last week's election left no group with a working majority in
parliament and that meant Italy could be inching closer towards
another election within months.
Marinov said investor uncertainty about Italy could escalate
if there is no government in place before the end of the month,
adding he expected the euro to target $1.28.

YEN RISES
The yen rose against the dollar and euro after confirmation
hearings of the government's nominees for two Bank of Japan
deputy governor posts, which had been widely expected by the
market.
The Japanese government has signalled it wants the BOJ to
pursue aggressive monetary easing to stimulate the economy, a
stance that has weighed heavily on the yen since November.
The dollar fell 0.4 percent to 93.09 yen, pulling
away from a high of 94.77 yen struck on Feb. 25, which was the
dollar's highest level against the yen since May 2010. The euro
dipped 0.3 percent to 121.37 yen.
Analysts said the dollar's drop against the yen was mostly a
reflection of market positioning as traders were probably long
dollar/yen going into Tuesday's confirmation hearings. Markets
are now waiting for some actual policy action after such
aggressive easing rhetoric for the dollar to make significant
gains, they said.
Some strategists however said that the dollar's ascent
against the yen was intact and dips would provide a good chance
to buy the pair.
"Overall, we continue to view near-term pull-backs into the
91.80 yen area as providing buying opportunities," analysts at
Morgan Stanley said in a note.