Euro on the ropes as ECB set to stick to QE despite recent pickup

[April 15, 2015]  By Anirban Nag

LONDON (Reuters) - The euro fell broadly on Wednesday, after the European Central Bank kept borrowing rates unchanged, as expected, and is likely to reiterate a dovish policy bias despite a recent pick-up in economic activity.

At Wednesday's meeting, the ECB left its main refinancing rate, which determines the cost of credit in the economy, at 0.05 percent. It also kept the rate on bank overnight deposits at -0.20 percent, which means banks pay to park funds with it.

Bets against the euro are at a high level but investors are still looking to sell into rebounds, with ECB President Mario Draghi likely to say the bank intends to fully deliver previously announced stimulus measures as risks to growth remain and inflation is subdued.

That would quash talk the ECB might scale down its asset purchase program sooner rather than later, and send the euro lower, traders said. Draghi may also address Greece's debt problems at his news conference scheduled for 1230 GMT.

The euro was down 0.7 percent at $1.0585 <EUR=> and 0.5 percent lower against the yen at 126.52 yen <EURJPY=>. It struck a one-month low against the dollar of $1.05205 on Monday and a two-year trough against the yen of 126.08 on Tuesday.

"It will be unrealistic to expect any changes (to the ECB's asset purchase program) so soon. If anything, the ECB will probably reiterate they stand to do more depending on the data," said Peter Kinsella, currency strategist at Commerzbank.

"All this means the euro will be a sell on rallies."

The euro had bounced on Tuesday, helped mainly by a weak dollar which faltered after U.S. retail sales data failed to meet the market's lofty expectations.

The data hit the dollar index , which had appeared to be back on track to test a 12-year high of 100.390 set last month, climbing as high as 99.990 on Monday. On Wednesday it stood at 99.242, up about 0.5 percent on the day.

The relatively strong market reaction to the sales numbers suggested dollar bulls were becoming frustrated with a recent run of unimpressive data and paring their long-dollar bets, as investors push back expectations of when the Federal Reserve will start raising interest rates to later this year from June.

"We are expecting the dollar to consolidate for the next month or so," said Carl Hammer, currency strategist at SEB. "The market is cautious about when the Fed will start raising rates," he said, adding investors would still look to buy the dollar.

SEB forecasts the euro to ease to $0.95 at the end of 2015.

Downbeat data from China hit the Australian dollar <AUD=> which was trading 0.5 percent lower at $0.7593. China's annual growth slowed to a six-year low of 7.0 percent in the first quarter, with other indicators slumping to multi-year lows.

(Editing by Robin Pomeroy)

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