Euro gains on hopes of German fiscal stimulus

NEW YORK (Reuters) - The euro rose on Monday after a report that Germany may boost fiscal stimulus increased hopes that governments will act to boost growth in the region, though expectations of further central bank easing kept a lid on gains.

FILE PHOTO: Euro currency bills are pictured at the Croatian National Bank in Zagreb, Croatia, May 21, 2019. REUTERS/Antonio Bronic

Germany is considering the creation of a “shadow budget” that would allow Berlin to boost public investment above and beyond limits set by its strict national debt rules, three people familiar with the internal discussions told Reuters.

“A key part of that coalition is the commitment to keep balanced budgets. If they are waiving from that it could be very supportive for the euro and very bearish for the dollar,” said Bipan Rai, North American head, FX strategy at CIBC Capital Markets in Toronto.

The euro gained to $1.1051 against the greenback, up 0.22% on the day, after earlier trading as low as $1.1014(0.8921 pounds).

Euro gains were capped, however, before the European Central Bank’s meeting on Thursday, when the central bank is expected to introduce a new wave of monetary stimulus.

“The default is to be negative euro into ECB,” said Kenneth Broux, head of corporate research at Societe Generale.

The euro may get a boost, however, if the ECB disappoints dovish expectations already baked into the market.

“We get the sense the market is expecting a bit too much of a dovish outcome this week and if that is the case that could imply that tactical long euro positions might do well,” Rai said.

In the United States, consumer price inflation data on Thursday and retail sales data on Friday are the main economic focus. They will come after Friday’s jobs report showed that U.S. jobs growth slowed more than expected in August.

The Federal Reserve will continue to act “as appropriate” to sustain the U.S. economic expansion, Fed Chair Jerome Powell said on Friday in Zurich, bolstering expectations for a rate cut at the Fed’s meeting on Sept. 18.

Sterling rallied to six-week highs on hopes that Britain will not crash out of the European Union without a deal, and after data showed Britain’s economy picked up more than expected in July.

It briefly pared gains after House of Commons Speaker John Bercow said he would stand down.

Additional reporting by Olga Cotaga in London; Editing by Chizu Nomiyama and Dan Grebler