February 8, 2019 / 11:47 AM / 7 months ago

FOREX-Euro set for biggest weekly drop in four months on gloomy outlook

* Mystery buyer keeps the single currency supported above $1.13

* Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh

By Saikat Chatterjee

LONDON, Feb 8 (Reuters) - The euro was on track for its biggest weekly drop in four months as data showed an economic slowdown in Europe was spreading, pulling government bond yields lower.

The euro consolidated at a two-week low in subdued trading. Some traders said large buy orders around $1.13 offered support.

With China out for holidays this week, market volatility has fallen. Investors have taken stock of the opening weeks of the year, and most of the consensus trades at the end of 2018 incurred losses.

Going into 2019, the dollar was expected to weaken, especially against the euro and the yen. But so far, it has gained more than a percent against the euro and been flat against the Japanese currency.

The European Commission cut its growth and inflation forecasts on Thursday, as downside surprises to German and Spanish industrial orders fuelled worries about an accelerating slowdown.

That data has weighed on bond markets; core government bond yields in Europe are at their lowest in over two years. Benchmark German yields are just 10 basis points away from zero percent.

MYSTERY BUYER Despite the weak data, traders were unwilling to sell the euro aggressively below $1.13. After hitting a low of $1.1323 on Thursday, the euro ended the day at $1.1338. It was stuck around that level on Friday.

“We are all scratching our heads on who the mystery buyer is on euro/dollar,” said Kenneth Broux, a currency strategist at Societe Generale in London.

One analyst pointed to the presence of large currency options amounting to nearly $1 billion around $1.1280 expiring later in the day as another possible prop.

Other traders said option structures between $1.12 to 1.16 have kept the currency in a tight band as banks have tried to curb volatility.

Implied volatility in the euro, or expected swings in the single currency, have fallen to below 4 vol, its lowest levels since late January.

Philip Wee, a currency strategist at DBS, thinks it is likely the euro will fall below $1.10 this year, given Europe’s weaker growth and inflation outlook compared that of the United States.

The dollar failed to make the most of the euro’s weakness, however. It traded a shade higher against its major rivals as trade tensions remained dominant.

Anxieties about the global economy were also compounded by comments from U.S. President Donald Trump, who said he did not plan to meet with Chinese President Xi Jinping before a March 1 deadline to achieve a trade deal.

That helped the perceived safe-haven currencies such as the Japanese yen and the Swiss Franc hold up against the dollar.

Sterling was marginally lower at $1.2941. Traders expect the pound to remain volatile because of the uncertainty surrounding Brexit.

Reporting by Saikat Chatterjee; additional reporting by Vatsal Srivastava in Singapore; editing by Larry King

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