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Euro rallies, but outlook stays bleak as ECB easing in focus

A cashier counts euro banknotes in Vilnius, Lithuania.
Ints Kalnins | Reuters

The euro rose from a two-month low against the dollar on Thursday, after the European Central Bank failed to deliver an interest rate cut that some investors had expected and after its president Mario Draghi offered a glimmer of optimism about his outlook on the euro zone economy.

Investors prior to Draghi's comments had priced in a dovish message.

The euro recovered after the ECB, which kept interest rates unchanged, said in its statement rates would stay "at their present or lower levels" and opened the door for more quantitative easing.

Despite Thursday's gains, the euro's outlook remained downbeat due to the prospect of further monetary easing.

"I think the market had fairly dovish expectations going into the ECB meeting and some in the market had priced in a cut," said Mazen Issa, senior FX strategist, at TD Securities in New York.

When the market did not get the cut, that was a signal to cover the shorts on the euro, he added.

"Now the question was: how dovish would Draghi be at his briefing? While he was pretty dovish, there were some positive elements as well," Issa said.

Draghi, at his press briefing, said he saw low risk of recession in the euro zone, but noted that a rebound in the second half was less likely, as he voiced concerns about stubbornly low inflation.

In mid-morning trading, the euro rose 0.3% to $1.1170, after earlier dropping to a fresh two-month low of $1.1102.

Earlier in the day, the euro was trading lower after a bleak German Ifo business sentiment survey for July.

The European common currency gained for the first time in five days and has shed 1.7% against the dollar so far this month.

The euro also rose 0.6% against the Swiss franc to 1.1038 francs, and was up 0.6% versus the yen at 121.20 yen.

The dollar index rose 0.1% to 97.81.

The greenback gained against the yen, however, rising 0.3% to 108.47 yen after a batch of generally positive U.S. economic data.

New orders for key U.S.-made capital goods surged 1.9% in June, while weekly jobless claims declined to 206,000 in the latest week.

"The strong data suggested any rate cuts by the Fed would be the modest insurance variety and not the start of a full blown easing cycle," said Joe Manimbo, senior market analyst, at Western Union Business Solutions in Washington.

The Federal Reserve's monetary policy meeting is scheduled next week, and investors are widely expecting an interest rate cut.

The pound, meanwhile, remained below $1.25 against the U.S. dollar and not far from the 27-month low it reached last week. It last traded at $1.2474 as new Prime Minister Boris Johnson assembled his cabinet.