FOREX-Euro buckles as pressure mounts on ECB to ease
* Euro wallows at two-week lows after sharp drop overnight
* Unexpected slowdown in inflation adds to pressure on ECB to do more
* China PMI data next in focus, U.S. ISM to follow
SYDNEY, Nov 1 (Reuters) - The euro nursed heavy losses early in Asia on Friday, having suffered its biggest one-day drop in over six months as a shock slowdown in inflation piled pressure on the European Central Bank to further stimulate the economy.
Data on Thursday showed inflation dropped to a four-year low of 0.7 percent in the euro area in October, way under the ECB's target of just below 2 percent. Other data showed unemployment held at record highs in September, and included alarming revisions to previous months.
The euro huddled at $1.3585 on Friday, having slid more than 1 percent to a two-week trough around $1.3515 overnight. It was now down 1.8 percent from a two-year peak of $1.3833 set just a week ago.
Immediate support was seen at $1.3557, a level representing the 76.4 percent retracement of its Oct 16-25 rally.
"The euro zone's consumer price report highlighted a growing threat for deflation," said David Song, currency analyst at DailyFX.
"Indeed, there's growing bets that the ECB will implement a rate cut or announce another long-term refinancing operating as it struggles to achieve the 2 percent target for inflation."
But traders warned about getting too carried away, noting the always cautious ECB could simply choose to maintain an easing bias as it continues to see a sustainable recovery in the euro zone.
The common currency also lost ground against other currencies including the yen and Australian dollar, falling 1.3 percent to 133.55 yen and shedding 0.8 percent to A$1.4329.
Renewed pressure on the euro saw the dollar index jump 0.7 percent to a two-week high of 80.273, pulling further away from a nine-month trough of 78.998 plumbed a week earlier. It last traded at 80.253.
The dollar, however, eased against the yen, dipping to 98.36 to be off this week's peak of 98.69.
In contrast to the euro zone, U.S. data was far more encouraging. Business activity in the U.S. Midwest surged past expectations in October as new orders hit their highest level since 2004, while weekly unemployment claims fell, countering recent evidence of soft economic growth.
The upbeat data only served to keep alive some expectations the Fed might scale back stimulus at its December meeting, though most analysts still tip March as the window for a move.
The strong Chicago survey has fuelled speculation the national ISM survey of manufacturing, due later Friday, could also surprise to the upside.
In Asia, hopes are high that China's manufacturing activity picked up pace in October, adding to signs of stabilisation in the world's second biggest economy.
The official PMI is due around 0100 GMT, followed by HSBC's final PMI report 45 minutes later.