Euro Stays Low as ECB Rate-Cut Speculation Grows

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The euro remained near a 2 1/2-month low on Monday on rising expectations that euro zone economic worries could prompt the European Central Bank to cut interest rates sooner than previously anticipated.

Although a Reuters poll last week showed economists expected the ECB to keep rates on hold this Thursday, some strategists said euro weakness would persist on growing expectations bank chief Mario Draghi would hint at future cuts.

Poor euro zone sentiment and unemployment data since last week could compel the ECB to revise down its outlook for the currency bloc's economy and consider earlier rate cuts, they said.

Data on Monday showed euro zone sentiment tumbled in March on renewed political uncertainty in Italy, the euro zone's third largest economy.

Italy appeared to be inching toward another round of elections after an inconclusive one last week. Analysts are concerned that without a stable government, the country will be unable to pass reforms required to get its borrowing and debt under control.

Italian 10-year bond yields as a result rose to 4.881 percent on Monday, underperforming all euro zone bonds apart from Greece's.

(Read More: Italy Election Punches Hole in ECB's Defenses)

"The euro continues to be firmly out of favor, as has been the case since the outcome of the Italian parliamentary election last month," said Samarjit Shankar, director of market strategy at BNY Mellon in Boston.

"That rekindled yet another bout of investor concerns due to the political uncertainty in the country in particular and the commitment of euro zone policymakers to austerity in general."

Renewed worries about Italy, the euro zone's third-largest economy, rattled investors, sending sentiment in the currency bloc down sharply in March and fueling speculation the ECB will lower interest rates in the near term.

Although a Reuters poll last week showed economists expected the ECB to keep rates on hold this Thursday, some strategists expect the bank to revise down its inflation projection and look for a 25-basis-point rate cut as early as the April meeting.

The euro hit a session low of $1.2980, not far from a 2 1/2-month low of $1.2965 struck on Friday, after the euro zone Sentix data was released. The shared currency was last little changed on the day at $1.3018.

Stop-loss orders are cited below $1.2960 with reported option barriers at $1.2950, $1.2925 and $1.2900. A break below $1.2900 could take the euro toward its next support at $1.2844, its 200-day moving average at current prices.

The euro was also 0.2 percent lower against the yen at 121.60 yen.

Overall the outlook for the euro was glum and some analysts said poor euro zone services Purchasing Managers' Index surveys on Tuesday and growth data on Wednesday could push the euro even lower if they fell below forecasts.

"The euro is down on a general risk-off mood ... Draghi could be more dovish and there could be a rate cut this week. If not, he could signal something is in the offing," said Jane Foley, senior currency strategist at Rabobank in London.

Dollar Strength

The weak euro zone data contrasted with a jump in U.S. manufacturing activity and this helped push the dollar to a six-month high of 82.509 against a basket of currencies on Friday. It last stood at 82.34, up 0.1 percent on the day.

Broad U.S. spending cuts that automatically kicked in Friday and threaten to dampen economic growth have so far not hurt the U.S currency.

Spreads between two-year U.S. government bonds over their German counterparts have also moved in favor of the U.S., helping the dollar. Investors are expecting the Federal Reserve to slow its asset purchase program later in the year as the U.S. jobs market shows signs of improvement.

"We're turning bearish euro/dollar," said George Saravelos, currency strategist at Deutsche Bank in London. "Even if Fed QE continues throughout 2013, U.S. two-year yields will turn up this summer and there's little additional good news that can be priced into the euro."

Investors discarded growth-linked currencies such as the Australian dollar after China announced measures to tighten curbs on the property market.

The Australian dollar fell to a near eight-month low of $1.0113 and was last down 0.1 percent on the day at $1.0190.

The dollar was down 0.2 percent against the yen at 93.40 yen.

Joseph Trevisani, chief market strategist at WorldWide Markets in Woodcliff Lake, New Jersey, said losses accelerated after going through stop-loss orders at 93.40, with support likely at 93.15 and 93.

Other central bank meetings and announcements this week include the Reserve Bank of Australia, the Bank of Japan, the Bank of Canada and the Bank of England.

"These central banks are likely to sound more dovish at the meetings, which should de facto support the dollar," said Sean Cotton, vice president and foreign exchange adviser at Bank of the West in San Ramon, Calif.

The U.S. data highlight will be jobs data on Friday for February.