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* Sharp rise in German sentiment data boosts euro
* Fed to kick off two-day policy meeting on Tuesday
* Italian political worries take a backseat for now
By Anooja Debnath
LONDON, Dec 11 (Reuters) - The euro rose on Tuesday after better-than-expected German investor sentiment data boosted sentiment.
Germany's ZEW index jumped to 6.9 in December, far higher than the -12.0 forecast and the previous reading of -15.7.
The euro climbed to a session-high of $1.2976 after the data, from around $1.2960 beforehand and breaking chart resistance at $1.2973, the 38.2 percent retracement of a sharp fall that took place between Dec. 5 and Dec. 7.
Traders cited offers above $1.2980 and $1.3000 with near term support at its two-week low of $1.2880 touched on Monday.
"The ZEW survey was a significant positive surprise and it helped the euro," said Ulrich Leuchtmann, head of FX research at Commerzbank. "We have seen a spike in the euro but anything significantly above $1.3100 is being ambitious due to a lot of resistance around those levels and will be difficult to hold."
Leuchtmann added that the data will throw into question the European Central Bank's grim forecasts for the region and prospects of an interest rate cut early next year. The Bundesbank has also slashed its growth forecast for Germany in 2013 and warned the country could tip into recession.
Expectations of a rate cut, grim economic prospects and the fresh political turmoil in Italy combined to push the euro to a two-week low against the dollar on Monday. But it has recovered after technocrat Prime Minister Mario Monti assured investors there was no danger of a vacuum before the elections.
"The euro's dip below $1.2900 proved to be short-lived," said Vassili Serebriakov, strategist at BNP Paribas. "FX markets are showing some notable resilience following news of Monti's imminent resignation."
Monti's move came after former prime minister Silvio Berlusconi abruptly withdrew support for Monti's technocrat government, claiming that his reform and austerity steps were dragging Italy "to the brink of a precipice."
The euro was also 0.3 percent up on the day at 1.2115 Swiss francs, after UBS mirrored Credit Suisse and levied a charge on some Swiss franc cash deposits.
Investors were reluctant to buy the dollar aggressively before a two-day U.S. Federal Reserve policy meeting starting on Tuesday. It is expected to replace its expiring 'Operation Twist' programme with another Treasury bond-buying plan when it announces its decision on Wednesday.
"We anticipate the Fed will announce Treasury purchases and as that depresses yields it will have a negative impact on the dollar and that supports the euro," said Jane Foley, senior currency strategist at Rabobank.
Many economists believe the Fed will announce monthly bond purchases of $45 billion, although some think it could be more.
The dollar index stood at 80.263, retreating from at two-week high of 80.658 hit on Monday.
Expectations of more easing from the Fed pushed the Canadian dollar to a two-month high of C$0.9862 per U.S. dollar, while the New Zealand dollar hit a nine-month high of $0.8367 .
But the dollar edged up 0.2 percent to 82.50 yen, not far from an eight-month peak of 82.84 hit last month on growing expectations of more stimulus from the Bank of Japan.