Euro gains on hopes of German fiscal stimulus

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The euro rose on Monday after a report that Germany may boost fiscal stimulus increased hopes that governments will act to boost growth in the region, though expectations of further central bank easing kept a lid on gains.

Germany is considering the creation of a "shadow budget" that would enable Berlin to boost public investment beyond the restrictions of constitutionally enshrined debt rules, three people familiar with the internal discussions told Reuters.

Government officials are flirting with the idea of setting up independent public entities that would seize the historic opportunity of zero borrowing costs and take on new debt to increase investment in infrastructure and climate protection, the officials said.

A key part of that coalition is the commitment to keep balanced budgets. If they are waiving from that it could be very supportive for the euro and very bearish for the dollar, said Bipan Rai, North American head, FX strategy at CIBC Capital Markets in Toronto.

The euro gained to $1.1053 against the greenback, up 0.24% on the day, after earlier trading as low as $1.1014.

Euro gains were capped, however, before the European Central Banks meeting on Thursday, when the central bank is expected to introduce a new wave of monetary stimulus.

"The default is to be negative euro into ECB," said Kenneth Broux, head of corporate research at Societe Generale. "Resuming bond purchases won't do anything" to the euro zone economy because "the monetary policy in Europe has stopped being effective," Broux added.

"The ECB has done all it can." The euro may get a boost, however, if the ECB disappoints dovish expectations already baked into the market. We get the sense the market is expecting a bit too much of a dovish outcome this week and if that is the case that could imply that tactical long euro positions might do well, Rai said.

In the U.S., consumer price inflation data on Thursday and retail sales data on Friday are the main economic focus. They will come after the jobs report on Friday showed that U.S. jobs growth slowed more than expected in August.

The Federal Reserve will continue to act "as appropriate" to sustain the U.S. economic expansion, Fed Chair Jerome Powell said Friday in Zurich, bolstering expectations for a rate cut at the Fed's meeting on Sept. 18.