* Euro wallows at two-week lows after sharp drop overnight
* Unexpected slowdown in inflation sparks ECB rate cut
* Euro seen under pressure ahead of Nov 7 ECB meeting
* Dollar main gain if upcoming US ISM data positive
* Aussie holds above 2-week low after decent China data
By Hideyuki Sano and Ian Chua
TOKYO/SYDNEY, Nov 1 The euro dropped to a
two-week low on Friday after a surprise slowdown in euro zone
inflation sparked speculation the European Central Bank may take
action to bolster the economy.
Euro zone inflation dropped to a four-year low of 0.7
percent in October, compared to a forecast of a flat reading at
1.1 percent, and way under the ECB's target of just below 2
"It should mean quite a lot for the ECB that inflation fell
below 1 percent. The slowdown in inflation does not seem to be
over yet," said Sho Aoyama, senior market analyst at Mizuho
"They know Japan's experience of deflation and that once
deflation takes hold, it could take decades to get out of it.
The ECB may not cut rates next week but it will imply it is
ready to do so," he added.
The euro fell to as low as $1.35385, its lowest since Oct.
17, and last stood at $1.3554, down 0.3 percent on the
day, after having fallen 1.1 percent the previous day.
The currency is now flirting with important chart supports
around $1.3550, including a level representing the 76.4 percent
retracement of its Oct 16-25 rally and a 38.2 percent
retracement of its rally since Sept.
The euro looks set to stay under pressure until the ECB's
next policy meeting on Thursday as other euro zone data also
showed unemployment held at record highs in September, and
included alarming revisions to previous months.
The common currency also lost ground against other
currencies including the yen, hitting a two-week low of 132.985
Renewed pressure on the euro saw the dollar index rising to
a two-week high of 80.418, pulling further away from a
nine-month trough of 78.998 plumbed a week earlier.
The dollar, however, eased against the yen, dipping 0.2
percent to 98.14 yen to be off this week's peak of 98.69,
largely in a knee-jerk risk-off reaction to fall in U.S. and
Still, in contrast to the euro zone, U.S. data was far more
encouraging. Business activity in the U.S. Midwest surged past
expectations in October as new orders hit their highest level
since 2004, while weekly unemployment claims fell, countering
recent evidence of soft economic growth.
The strong Chicago survey has fuelled speculation the
national ISM survey of manufacturing, due later on Friday, could
also surprise to the upside.
The upbeat data only served to keep alive some expectations
the Federal Reserve might scale back stimulus at its December
meeting, though most analysts still tip March as the window for
The Australian dollar managed to hold above Wednesday's
two-week low of $0.9441 after two Chinese manufacturing surveys
posted decent readings.
The final HSBC/Markit Purchasing Managers' Index (PMI)
showed China's giant manufacturing sector grew at its fastest
rate in seven months in October. China's official PMI released
earlier in the day put manufacturing growth at 51.4, the highest
in 18 months.
The Aussie stood flat on the day at $0.9460.