Euro drops as ECB set to stick to QE despite recent pickup

The euro fell against the dollar on Wednesday before a policy meeting at which the European Central Bank is likely to reiterate its dovish policy bias despite a recent pick-up in economic activity.

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 programme sooner rather than later, and send the euro lower, traders said. Draghi may also address Greece’s debt problems at his press conference scheduled for 1230 GMT.

The euro was down 0.4 percent at US$1.0610 EUR= and pared its gains against the yen to trade at 126.85 yen EURJPY=. The common currency struck a one-month low against the dollar of US$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 programme) 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 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 .DXY, 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 98.893, up about 0.25 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.

Downbeat data from China hit the Australian dollar. China’s annual economic growth slowed to a six-year low of 7.0 percent in the first quarter, with other key indicators slumping to multi-year lows.

“Pressure for more easing by the People’s Bank of China will continue until some relief is given but the Chinese economy is less and less able to act as an engine of global growth,” analysts at Societe Generale said in a note. “We’ll stick with bearish Aussie trades.”

Source: Reuters