The euro slipped against the dollar and the yen on Wednesday as grim economic data strengthened expectations the European Central Bank is about to cut interest rates, likely keeping the single currency under pressure.
It slumped to a 11-1/2 year low against the higher-yielding Swedish crown after Sweden’s central bank kept interest rates unchanged and only slightly trimmed its forecasts for future borrowing costs, despite risks from the euro zone crisis.
The euro was also lower on bond redemption-related selling, with some investors on the sidelines given a U.S. market holiday that kept volumes on the low side, traders said.
The euro shed 0.3 percent to $1.2575, still holding above Tuesday’s low of $1.2559. Immediate resistance loomed at $1.2693, a high reached last Friday after European leaders hammered out a deal to tackle the region’s debt crisis.
“The market looks primed for a 25 basis point cut by the ECB, but something more like a liquidity injection would be needed to lift the euro,” said Paul Robson, currency strategist at RBS.
“Investors will also want to see if the ECB President (Mario Draghi) will highlight downside risks to growth and inflation, which will set the ground for more easing.”
Pressure on the ECB to ease policy has gathered pace as the region’s economic slowdown has deepened on the back of tight credit conditions that are providing strong headwinds to growth amid fiscal tightening and austerity.
Near-term inflation pressures have also eased following a sharp drop in energy prices over the last couple of months, giving extra scope for a rate cut.
Data on Wednesday showed Germany’s services sector unexpectedly stagnated in June. And while a contraction in France’s services sector eased, business expectations slumped to their lowest in three years, underlining how bleak conditions in Europe are.
Analysts said that, while a slew of measures to support growth from the ECB could help the euro, given that investors have significantly large bearish positions, any disappointment could see the currency come under fresh pressure and bring the June 28 low of $1.2407 back into focus.
Currency dealers said Japanese investors received principal on redeemed euro zone bonds which was swiftly converted to yen. That pushed the euro 0.25 percent lower against the yen to 100.36.
A trader in a major Japanese bank said that the euro had dipped in Asian trade due to bond redemption flows.
“Using that opportunity, I sold dollar/yen, but have since closed my positions in both pairs and I’m taking a wait-and-see stance ahead of the ECB tomorrow,” the trader said.
A string of weak data out of the United States and Europe has spurred expectations of more stimulus from both the ECB and the Federal Reserve.
This has encouraged the market to use the euro and U.S. dollar as funding currencies for carry trades, traders said.
While easing global monetary conditions should bolster risk appetite and may lend some support to the euro, it is likely to underperform the growth-linked currencies as a lower interest rate would be euro-negative.
Also, flooding markets with extra cash tends to drive investors to chase higher-yielding currencies.
“We are short euro against the commodity currencies like the Aussie, the New Zealand dollar and the Swedish crown,” said Stuart Frost, head of Absolute Returns and Currency at fund managers RWC Partners.
“The ECB is unlikely to surprise as it would want to save its ammunition for a later date. We expect euro/dollar to drift lower.”
The euro fell to a 4-1/2 month low against the Australian dollar around A$1.2211.
It slid to a 11-1/2 year low of 8.6956 against the crown as long-term investors and hedge funds sold the euro after the Riksbank kept rates unchanged at 1.5 percent as expected.
Traders said a hedge fund sold and stop loss orders were triggered on the break of 8.70 crowns.
“I would be very cautious going short down here,” said a London based trader. “Due to Sweden’s high exposure to Europe, there is a chance that the Riksbank will need to cut rates against their forecasts should the situation in the euro area worsen.”