LONDON: The euro sank to a new two-month low against the dollar on Thursday as investors waited for the European Central Bank to confirm that borrowing costs will get cheaper and that it will start buying bonds again.
Money markets are pricing in a 50% chance of a 10 basis points interest rate cut by the ECB on Thursday, a smaller probability than last week, but some expect that President Mario Draghi will open the door for further cuts down the road or for more quantitative easing.
However, some analysts expect the central bank to be way less dovish and only tweak its forward guidance by re-introducing the easing bias.
“We’ve seen consistent demand for downside euro in options, and euro is underperforming in spot…our best guess is euro ends the day higher,” said Elsa Lignos, strategist at RBC Capital Markets, adding that RBC analysts expect the ECB to wait until September to cut the key benchmark rate.
These opposing views in the market are reflected in euro overnight implied volatility jumping to 12.73, its highest since December.
The euro dropped at $1.1126. The ECB announces its rate decision at 1145 GMT, followed by a news conference at 1230 GMT.
The Swiss franc, buoyed by expectations of lower rates in the euro zone, rocketed to a new two-year high of 1.0965 against the common currency and was trading at 1.0969.
Elsewhere, expectations of lower interest rates sent the Australian dollar to a new two-week low of $0.6964.
The pound remained below $1.25 and not far from the 27-month low it reached last week, last trading flat at $1.2475 and at 89.26 pence against the euro .
Traders will be looking for the German Ifo current conditions survey, due 0800 GMT. Economists polled by Reuters are forecasting a small decline to 100.4 in July from 110.8 in June.