FOREX-Euro pinned to recent lows, wary of soft EZ inflation data

Tue Jun 3, 2014 4:06am EDT

Related Topics

* Euro wobbles lift dollar index to highs seen in mid-Feb

* Soft German inflation cements expectations of ECB action

* Eyes on EZ inflation reading at 0900 GMT (Updates quotes, prices)

By Anirban Nag

LONDON, June 3 (Reuters) - The euro struggled near recent lows on Tuesday, before euro zone inflation numbers that are expected to highlight declining price pressures in the region and bolster the case for aggressive monetary stimulus from the European Central Bank.

Euro zone flash inflation data for May is due at 0900 GMT and while the consensus is for a 0.7 percent rise year-on-year, a number of big banks have already slashed their forecasts after soft German numbers on Monday.

Barclays, RBS and JPMorgan now expect an annual inflation reading of 0.5 percent, way below the ECB's target of near or just below 2 percent. A softer reading will boost the chances of the ECB loosening policy when it meets on Thursday. Measures are expected to include negative deposit rates, the rates at which banks park excess cash with the ECB, and that could see the euro come under more pressure, analysts said.

The euro was trading flat at $1.3601, near a 3-1/2 month trough of $1.3586 plumbed late last month. Traders said with most speculators already running bets against the common currency only a weaker-than-expected inflation reading could take the euro towards $1.3580 - levels last seen in mid-February.

"Things might look a little different if the inflation rate only reaches 0.4 percent," said Antje Praefcke, currency analyst at Commerzbank. "This might wake up the odd sleepy heads and create a little more pressure on the euro. But even then things are likely to peter out in the area of $1.3530-50."

Traders said for the euro to drop sharply, the dollar has to strengthen further. U.S. factory orders for April are due on Tuesday and a robust number may boost Treasury yields and help the dollar.

The dollar hovered near a four-month high against a basket of major currencies bolstered by recent upbeat U.S. data.

Trading was choppy in Asia, reflecting some confusion after the U.S. Institute for Supply Management corrected its manufacturing activity index for May to 55.4, from a below-consensus reading of 53.2. The ISM said it had to make the correction due to an error in applying the seasonal adjustments.

U.S. Treasury yields rose as a result, helping boost the dollar's allure. The dollar index stood at 80.60, within close reach of Monday's four-month high at 80.681.

"Following yesterday's U.S. data confusion, the dollar has maintained its recovery trend and we expect further broad-based gains today," Morgan Stanley said in a daily note.

"We maintain our long dollar strategies, with dollar/yen remaining the exception to the rule and where we have used the recent rebound to re-establish dollar short positions."

Against the yen, the greenback fetched 102.30, having risen 0.6 percent on Monday in its biggest one-day rise in over two months.

The Australian dollar inched up after the Reserve Bank of Australia kept interest rates unchanged and refrained from trying to talk the currency down as some market watchers had speculated. It rose 0.3 percent to $0.9275. (Additional reporting by Shinichi Saoshiro in TOKYO; Editing by Susan Fenton)

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