FOREX-Euro inches higher, sterling eyes BoE

Wed May 14, 2014 3:20am EDT

Related Topics

* Euro recovers from 5-week low below $1.37

* Still weak against Aussie, sterling, other pairs

* Sterling awaits BoE report and UK jobs data (New throughout)

By Patrick Graham

LONDON, May 14 (Reuters) - The euro steadied just above five-week lows against the dollar on Wednesday, with some market players citing support from sales by the Bank of Korea of dollars gained from intervention against the won overnight.

Such recycling of reserves by both the South Korean and Chinese central banks, both of whom have sought to weaken their currencies this year, is one of a shopping list of flow-related factors helping the euro.

But a strong message from the European Central Bank last week on its willingness to cut interest rates further in June has given euro bulls pause for thought, knocking the single currency back as much as 3 full cents against the dollar.

It gained just over 0.1 percent on Wednesday to 1.3719, having hit a low of $1.36885 at the end of the European trading day on Tuesday.

"We've had three big figure moves since last week so overall it makes sense for it to stabilise around here for a moment," said Graham Davidson, a trader with NAB in London.

"But my feeling is the overall direction is still down."

A report that Germany's traditionally cautious Bundesbank was ready to support a wide array of easing measures by the ECB next month added to the weakness of the single currency on Tuesday and its head, Jens Weidmann, speaks at a conference later on Wednesday.

Notably, the single currency was weaker against a number of other currencies, touching a new 16-month low against sterling of 81.345 pence in late Asian trade.

Some in the market expect a hawkish message from the Bank of England's quarterly report on inflation later on Wednesday, which would add to expectations the bank will move forward with rises in interest rates by this time next year.

Continuing improvement in the labour market, in monthly data due before Governor Mark Carney's news conference, are expected to add to that message.

"The BoE inflation report and subsequent press conference could introduce less dovish language, recognising recent momentum in the economy," analysts from U.S. bank Citi said in a morning note.

"The effort to introduce greater uncertainty and raising the probability of an early hike would be positive for the pound."

CARRY TRADE

The euro has slid roughly 2 percent since Thursday when ECB President Mario Draghi said the bank was ready to take action next month to boost the euro zone economy if updated inflation forecasts merit it.

"Euro will remain offered on rallies into the June meeting," said Jeffrey Halley, FX trader for Saxo Capital Markets in Singapore.

"It has become the carry trade funding currency of choice, which has added to the selling pressure."

In carry trades, investors sell low-yielding currencies such as the euro to fund their investment in higher-yielding currencies and assets.

Halley said the euro could head back toward the top of its recent range if the ECB holds off from any additional monetary stimulus in June.

Against the Australian dollar, the euro touched a near six-month low of A$1.4583

"The euro's fading resilience since last week's ECB meeting suggests the currency should remain vulnerable to softer data including today's March eurozone industrial output where our economists expect a 0.2 percent decline," analysts at BNP Paribas wrote in a note to clients. (Additional reporting by Ian Chua in Sydney and Masayuki Kitano; Editing by Alison Williams)

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