FOREX-Euro bounces but ECB easing prospects restrain gains

Tue May 27, 2014 1:35am EDT

Related Topics

* Euro off lows thanks to a bit of short squeeze

* Downtrend still intact as ECB Draghi reinforces policy speculation

* Another quiet session expected with no major data in Asia

By Ian Chua and Hideyuki Sano

SYDNEY/TOKYO, May 27 (Reuters) - The euro bounced back from a three-month low against the dollar on Tuesday, but the uptick failed to relieve persistent pressure from expectations of monetary easing by the European Central Bank next week.

The common currency climbed to $1.3656, from Monday's three-month low of $1.3615. Against the yen, it traded at 139.24 , off a low of 138.73. Just last week, the euro hit a three-month trough of 138.15.

Traders said a squeeze in short euro positions had given the euro some support overnight as it managed to stay above major technical markers such as its 200-day average against the dollar and 100-day average against the yen.

"It's a sad reflection of the lack of volatility in FX markets that we now report 30 point moves as being newsworthy," said Sean Keane, a director of Triple T Consulting and formerly a markets trader at Credit Suisse.

Markets have so far showed little reaction to victories by Eurosceptic parties in European Parliament elections and news that Ukraine has launched air strikes against pro-Russian rebels.

Prospect of some policy action from the European Central Bank (ECB) at its June 5 meeting has been weighing on the common currency in the past few weeks and comments from ECB chief Mario Draghi on Monday reinforced those expectations.

Draghi said the bank must be "particularly watchful" for any negative price spiral in the euro zone, adding "more pre-emptive action may be warranted" to guard against a drop in price expectations.

Reuters reported earlier this month that the ECB is preparing a package of policy options for its June meeting. It includes cuts in all its interest rates as well as targeted measures aimed at boosting lending to smaller firms.

The push back in the euro saw the dollar index give a bit of ground, retreating further from Friday's seven-week peak of 80.443. It was last at 80.233.

The greenback was steady on the yen at just under 102.00 and still near a 1-1/2 week high of 102.05 set on Monday.

"Recent falls in U.S. bond yields have put a brake on the dollar. Still, on the whole, it's not like the U.S. economy is losing momentum, so the yen will be under pressure and in fact t has been weakening against some emerging currencies," said Minori Uchida, chief FX strategist at Bank of Tokyo-Mitsubishi UFJ.

The Australian dollar strengthened about 0.2 percent to $0.9257, though the currency was stuck in a familiar trading range since it had found good support just above 92 U.S. cents.

A dearth of market-moving economic data out of Asia on Tuesday contributed to a lacklustre trading session, with an equally sluggish performance in equity markets leaving currencies in a tight range. In Europe, ECB's Draghi is scheduled to participate in an armchair discussion in the final day of the ECB forum. (Editing by Shri Navaratnam)

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