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Euro near recent lows, undermined by ECB easing expectations

The euro fell against the dollar on Monday, as subdued inflation readings in Germany and slower-than-expected manufacturing growth in the euro zone piled pressure on the European Central Bank to aggressively ease monetary policy this week.

Currency speculators increased short positioning on the euro to 16,633 contracts from 9,220 last week, according to data for the week ended May 27 released by the Commodity Futures Trading Commission on Friday.

The ECB is preparing a package of policy options for its June 5 meeting that includes cuts in all its interest rates, Reuters reported last month.

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The euro fell about 0.2 percent to just below $1.36 in the European session, not far from a three-month low touched on Thursday. It also fell against sterling near 81 pence, with diverging monetary policy outlooks between the ECB and the Bank of England underpinning the pound.

In the United States, May ISM Manufacturing data is due out at 1400 GMT, and forecasts are for a reading of 55.5, up from 54.9 previously. That should bolster a view that the first-quarter blip in U.S. growth was caused by extraordinary factors.

While growth in the U.S. manufacturing sector is set to accelerate, the final reading of the manufacturing Purchasing Managers' Index (PMI) for the euro zone disappointed. The index slipped to a six-month low of 52.2 in May from April's 53.4.

Additionally, data from German states on Monday suggested annual inflation in Europe's largest economy was slowing. The national rate is due to be released at 1200 GMT and a soft number could push down the broader euro zone rate.

Euro zone inflation data is due out on Tuesday.

In the options market too, investors were adding to bearish bets. The three-month risk reversal for the euro/dollar, a gauge of demand for options betting on a currency rising or falling, were showing greater bias for euro weakness.

Yen wobbles

The yen wobbled as M&A news raised the prospects of more outflows, and strong China data whetted investors' risk appetite, lessening the appeal of the safe-haven currency.

Japanese insurer Dai-ichi Life Co is in advanced talks to buy U.S. insurer Protective Life Corp in a deal that could be worth over $5 billion.

On Sunday, China's official data showed factory activity expanded at its quickest pace in five months in May, underscoring Chinese economy's solid second quarter improvement.

The dollar bought 102 yen, up about 0.25 percent.

Even the euro was a touch firmer at 138.80 yen.

—By Reuters

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