FOREX-Draghi comments support euro, UK growth disappoints

Tue Apr 29, 2014 6:39am EDT

Related Topics

* Euro up after Draghi reported saying QE a long way off

* Sterling dips after slight disappointment on GDP

* Asian session subdued with Japan shut for holiday (Adds more comment, reaction to UK data)

By Patrick Graham

LONDON, April 29 (Reuters) - The euro inched up against the dollar on Tuesday, helped by comments from European Central Bank policymakers cooling any expectations that the bank will respond to low inflation by easing monetary conditions further.

Sterling pulled back from a four and a half year high against the dollar after the first estimate of gross domestic product showed growth improving slightly but less than most economists had expected.

The euro has struggled to push past a series of technical barriers since a first approach last month to the big psychological figure of $1.40 prompted warnings from the ECB about the currency's strength.

But short-term euro zone interest rates continue to push higher, boosting returns on the currency, and a source on Monday said ECB President Mario Draghi had told German lawmakers outright money-printing by the bank was still a long way off.

Preliminary German numbers later on Tuesday are also expected to show inflation inching back up, easing pressure on the bank to take action to fend off the risk of a cycle of falling prices and demand.

"Draghi's comments are one of the reasons the euro is holding strong this morning," said Stephen Gallo, a strategist with Canadian bank BMO in London.

"I think the market is coming to the realisation that they are quite relaxed about the threat of disinflation. There are a lot of temporary factors behind the fall in inflation."

Like many dealers and analysts, however, he underlined the lack of appetite to test the ECB's resolve to take action against a stronger euro and any resulting drop.

The common currency rose around 0.1 percent to $1.3860 . It also rose 0.3 percent to 142.37 yen, well above a one-week low of 140.99 yen seen on Monday.

Moves among major currencies were muted in Asia, as a public holiday in Japan dampened trading activity.

"The euro seems to have gained a foothold around $1.3860, but I'm not sure there is the appetite in the market to take it higher," said a dealer with one U.S.-based bank in London.

UK DISAPPOINTMENT

The day's first big data release showed Britain's economy, one of the brightest in the developed world, improved further in the first quarter, but there was widespread disappointment in a market that had been counting on a stronger figure.

"The GDP figures have taken the wind out of sterling. It was less so against the euro but there were quite a few people hoping for another spurt higher against the dollar," said another London-based dealer.

Having gained early on, the data turned sterling back broadly flat against the dollar at $1.6802.

Bank of England chief Mark Carney sounded constructive on the economy in an interview with a regional newspaper published on Tuesday, though he said there remained a lot of slack in the labour market - reflecting a concern over the sources of growth that may yet keep interest rates low well into next year.

While sterling remains buoyant on the back of expectations that the bank will raise official returns on the pound in 2015, views on its ability to add much to a 10 percent rise over the past 12 months are divided. (Editing by Gareth Jones)

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