August 27, 2014 / 11:21 PM / in 3 years

FOREX-Harried euro gets reprieve ahead of inflation test

* Euro pops up from a near one-year low against USD

* Market reassesses dovish ECB expectations for next week

* Aussie at 3-week highs ahead of capital spending data

By Ian Chua

SYDNEY, Aug 28 (Reuters) - The euro clung onto modest gains early on Thursday, having snapped three straight sessions of declines as feverish speculation of an imminent round of easing by the European Central Bank cooled.

Sources told Reuters on Wednesday that the ECB is unlikely to take new policy action next week unless inflation figures on Friday show the euro zone sinking significantly towards deflation.

That prompted investors to trim very bearish euro positions, pushing the common currency briefly above $1.3200 from a near one-year low of $1.3152. It last traded at $1.3193.

Against the yen, the euro bounced to 137.02 from a two-week trough of 136.75. It also recovered a bit of ground on the Swiss franc, climbing to 1.2066 from a near two-year low of 1.2060.

“The euro is going through a moderate corrective bounce as markets reassess their dovish ECB expectations for next week’s policy meeting,” analysts at BNP Paribas wrote in a note to clients.

They said “investors should position for further euro weakness” believing there are other drivers in place including an escalating trade war with Russia and a shift in the Federal Reserve’s policy stance that should weigh on the currency.

The rebound in the common currency knocked the dollar index off a 13-month peak. It was last at 82.462, down from the high of 82.727.

Another standout currency was the Canadian dollar, which rallied nearly 1 percent on the back of corporate takeover news and speculation that upcoming local economic growth data might come in stronger than expected.

The loonie powered to a one-month high of C$1.0829 per USD from C$1.0956. It was last at C$1.0866.

Its Australian peer also fared reasonably well, rising to a three-week high of $0.9352 ahead of capital spending data that could make or break demand for the currency.

One key figure to look out for is spending intentions for the 2014/15 financial year. The previous estimate was for A$137.1 billion.

“Anything less than last quarter’s expectation would be soft while a number closer to $150 billion would be encouraging,” said David de Garis, senior economist at National Australia Bank.

Traders generally expect the currency market to settle into a slim trading range in the lead up to the euro zone inflation figures on Friday, which are expected to show the annual rate dipping to 0.3 percent in August from 0.4 percent.

Preliminary German inflation data due later Thursday will be closely watched to gauge how soft the euro zone numbers could be.

An update to second quarter U.S. growth data should also garner some attention, although the report should affirm the economy had rebounded sharply from the first quarter. (Editing by Eric Meijer)

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