Euro falls below $1.23 as ECB eyed; sterling drops

Frankfurt (Apr 20)  The euro weakened below $1.23 on Friday and is poised for its biggest weekly drop in two months as investors trimmed record high bets before a European Central Bank meeting next week where policymakers are largely expected to signal no change in policy.

Commodity currencies such as the Australian dollar and the Kiwi came under pressure thanks to a drop in Chinese stocks, while sterling extended losses for a second consecutive day after the central bank dampened expectations of a May rate hike.

Long euro bets are the biggest consensus trade in the foreign exchange market, with net positions holding near a record high despite PMIs recording a sizeable drop in March and mixed inflation data.

“We are seeing the euro stuck in a range and unless the ECB signals a major change in policy we expect the currency to be trapped around these levels,” said Kenneth Broux, an FX strategist at Societe Generale in London.

The European Central Bank meets next week and expectations have grown that policymakers may take another small step in exiting its ultra-easy monetary policy after dropping a long-standing pledge to increase its bond buying if needed at its last meeting in March.

But Nordea markets strategists believe such a step may be hasty, given some signs of a softening in economic data and brewing concerns of an escalation in trade disputes.

The central bank still wants to emphasise patience, prudence and persistence”, they said in a note. “Forward guidance will thus likely be left unchanged next week, while Draghi’s tone should be relatively dovish.”

Despite a 0.4 percent drop to $1.2299 on Friday, the single currency has traded within a broad 1.21 to 1.25 range for much of this year even as long euro positions have swelled to a record $23 billion.

Reuters

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