January 25, 2019 / 12:27 PM / a month ago

RPT-FOREX-Euro rebounds as investors absorb ECB caution

(Repeats to additional subscribers)

* Euro recovers as ECB caution priced in

* Sterling gains 0.4 pct vs U.S. dollar on Brexit hopes

* Aussie and kiwi dollar edge higher

* Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh

By Tom Finn

LONDON, Jan 25 (Reuters) - The euro rebounded on Friday as investors moved to price in signs of a slowdown in economic growth and more caution from the European Central Bank about removing stimulus any further.

ECB President Mario Draghi warned on Thursday that a dip in the euro zone's economy could be more pronounced than thought a few weeks ago, comments seen as signalling a delay in the bank's first interest rate hike.

The euro weakened broadly on his comments and fell to a two-month low against the dollar of $1.1289. But on Thursday the single currency recovered, rising 0.3 percent to $1.135.

"A relatively dovish performance from Draghi was already in priced in," said John Hardy, head of FX strategy at Saxo Bank.

"The overriding issue of the U.S.-China trade talks is keeping traders sidelined on committing to USD trades until the outcome is known there," he added.

Markets are pricing in an interest rate rise only for mid-2020 as the euro zone economy is suffering its biggest slowdown in more than half a decade, with no recovery in sight.

Indeed, a key German business morale indicator fell for the fifth straight month in January.

The euro, which has traded in a range of $1.12 to $1.16 for the past three months and analysts expect it to underperform in the near term as monetary policy is expected to remain accommodative for now.

Sterling reached an 11-week high on Friday after a report that Northern Ireland's Democratic Unionist Party had privately decided to offer conditional backing for Prime Minister Theresa May's Brexit deal next week.

The Sun report pushed the pound 0.4 percent higher to $1.3114, its highest since Nov. 8. Sterling has risen about 1.8 percent this week, moving above $1.30 to the dollar on hopes Britain will avoid a no-deal Brexit on March 29.

The dollar index, a gauge of its value versus six other major currencies, fell 0.3 percent to 96.309.

The dollar is facing a tough year as growth at home and globally comes under pressure and the Federal Reserve moves closer to pausing its rate-hike cycle.

Interest rate futures are pricing in no rate change by the Fed through 2019, a turnaround from the four increases it last year in a major boost to the dollar. (Additional reporting by Vatsal Srivastava; Editing by Toby Chopra)

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