Euro firm on expectations of inflation uptick; pound surges

Mon Apr 28, 2014 4:17am EDT

Related Topics

* Sterling at 4 1/2-year high vs dollar

* U.S. jobs, euro zone inflation major event risks

* Fed and BoJ policy meetings also in focus (Recasts, adds fresh comments, details)

By Anirban Nag

LONDON, April 28 (Reuters) - The euro rose to a two-week high against the dollar on Monday, supported by expectations inflation in the euro zone will tick up and ease pressure on the European Central Bank to loosen monetary policy.

Sterling rose to a 4 1/2-year high against the dollar , boosted by robust UK data and expectations of merger and acquisition inflows, after U.S. drugmaker Pfizer confirmed it had made a bid approach to Britain's second-biggest drugs group, AstraZeneca.

But most are unlikely to take aggressive positions before major events in the United States and the euro zone. Policy reviews by the U.S. Federal Reserve and Bank of Japan (BoJ) will also keep the market cautious in a holiday-shortened week. Many centres in Europe and Asia will be shut on Thursday for Labour Day. Japan will be closed on Tuesday.

The euro rose 0.3 percent to $1.38765. Against the yen it was up 0.2 percent at 141.75 yen. The pan-European FTSEurofirst 300 index, which rose to near its six-year high earlier this month, rose 0.5 percent in early trade, improving sentiment for the euro.

Traders said expectations that euro zone consumer price inflation could rise when data is released later this week were helping the single currency. Euro zone inflation for April, due on Wednesday, is forecast to rise to 0.8 percent, year-on-year, from 0.5 percent, previously.

"We are seeing some inflows into the euro," said Ian Gunner, a portfolio manager at Altana Hard Currency Fund. "Euro zone inflation should confirm that we have seen the lows. If inflation comes in line with expectations, we could see euro trading at $1.39 when the ECB meets next week."

DOLLAR FOCUS

The dollar was steady against the yen at 102.215 yen, well within its range over the past two weeks. U.S. yields, which have a good correlation to the pair, nudged higher in anticipation of encouraging economic data out of the U.S., including jobs numbers at the end of the week.

"There are three clear U.S. highlights - first-quarter GDP and the Federal Reserve decision on Wednesday and April's labour report on Friday," said Tom Levinson, a currency strategist at ING. "GDP may well be soft, but we take comfort from far better prospects for second quarter. The report should, though, be offset by a firm ISM survey and 200,000 plus nonfarm payroll report."

All this would see the Fed trim its asset purchases by another $10 billion to $45 billion, he said.

Despite prospects of a Fed tapering, the safe-haven yen was supported as investors kept an eye on tensions in Ukraine.

Pro-Russian rebels paraded European monitors they are holding in eastern Ukraine on Sunday. They had freed one but said they had no plans to release another seven. Meanwhile, the United States and Europe prepared new sanctions against Moscow.

The Fed is expected to cut back further on its bond-buying stimulus, but the BOJ is expected to maintain its stimulus programme at its April 30 meeting. (Additional reporting by Masayuki Kitano in Singapore; Editing by Larry King)

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