May 13, 2014 / 11:26 PM / 4 years ago

FOREX-Euro vulnerable after fresh setback, sterling eyes BOE

* Euro hits five-week lows vs USD, plumbs 16-month low on sterling

* WSJ report says Bundesbank willing to back ECB easing next month if needed

* Sterling awaits BOE report and UK jobs data

By Ian Chua

SYDNEY, May 14 (Reuters) - The euro languished at five-week lows against the dollar early in Asia on Wednesday, having come under renewed pressure as markets grew more convinced the European Central Bank would ease policy next month.

The euro last traded at $1.3704, not far from the overnight low of $1.3688. A break below the April 4 trough of $1.3672 would take it back to levels not seen since late February.

It has slid more than 2 percent since Thursday when ECB President Mario Draghi said the bank is ready to take action next month to boost the euro zone economy if updated inflation forecasts merit it.

The euro’s latest decline was sparked by a report on the Wall Street Journal that said the Bundesbank is willing to back an array of stimulus measures from the ECB next month if needed to keep inflation from staying too low.

“The euro’s fading resilience since last week’s ECB meeting suggests the currency should remain vulnerable to softer data including today’s March eurozone industrial output where our economists expect a 0.2 percent decline,” analysts at BNP Paribas wrote in a note to clients.

The euro also lost ground against the yen, slipping to 140.12 and nearing a two-month trough of 139.88 plumbed on Friday. Against sterling, it struggled near a 16-month low of 81.32 pence set overnight.

Traders said the near-term outlook for sterling hinges on the Bank of England inflation report and UK employment data due later in the day. Both could potentially provide fresh signals on the timing of an expected rise in UK interest rates.

JPMorgan analysts said they are expecting the BOE report to provide some confirmation of market expectations for gradual tightening beginning early next year, “although this should be tempered by a BOE very much comfortable with the absence of inflation pressures.”

Pressure on the euro helped the dollar index rise to a five-week high of 80.180. It was last at 80.116. The greenback also firmed on the yen, pushing up to its highest in over a week at 102.37.

There was little reaction in the Australian dollar to the federal government’s tough budget as most of the measures had been leaked in the weeks leading up to the announcement late on Tuesday.

The Aussie last stood at $0.9361, still hovering just below 94 U.S. cents, a level that has capped the currency since mid-April.

Moody’s said the government’s fiscal plan was supportive of the country’s stable triple-A credit rating, while S&P said the budget was “consistent with our view of strong political commitment to prudent budget finance.”

“Despite all the concern in the lead up, most measures were well flagged with no real negative surprises,” said Alan Oster, chief economist at National Australia Bank in Melbourne.

“Overall, the market sees the budget as a good start towards addressing the looming structural pressures facing government finances.” (Editing by Shri Navaratnam)

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