LONDON: The euro was steady on Thursday as investors waited to see if the European Central Bank would provide more support to indebted euro zone countries, a move that could give the common currency a slight boost.
But gains are likely to be limited ahead of a crucial EU leaders meetings on Thursday night and Friday, with doubts already creeping in about whether politicians can agree to a comprehensive fiscal plan that will address the euro zone's two-year-old debt crisis.
The euro was flat on the day at $1.3415, roughly in the middle of its tight $1.3332-3486 range from the past week. It got a slight lift early in the European session after Clearing houses LCH.Clearnet SA and Cassa Di Compensazione e Garanzia cut the margin requirements on Italian bonds.
It had nudged higher in the Asian session after the Nikkei business daily said the G20 was preparing a $600 billion lending facility for the IMF to help Europe, but the move faded after it was denied by G20 and IMF officials.
The euro has gained 1.5 percent since it struck a seven-week trough of $1.3213 on Nov. 25, with investors still wary to build positions as many do not believe that the EU summit will provide a fix to the two-year old sovereign debt crisis.
"Some of the optimism from the summit has dissapated and I do not expect much of a surprise from the ECB either," said Jeremy Stretch, head of currency strategy at CIBC World Market.
"The euro will trade in a range of $1.3350-1.3450 with the ECB chief putting the onus on politicians to get their act togather before he cant provide more support in the form of buying more peripheral debt."
Money markets are fully pricing in a 25 basis point rate cut by the ECB on Thursday with the risk of more easing next year. With monetary policy already easy, markets expect the ECB to lean more towards non-standard measures like more liquidity injection and loosening of collateral eligibility.
According to Citi's index on hedge fund positioning, there has been little evidence of short covering over the past two weeks and not much substantial buying in anticipation of this week's events.
"This could soften the blow on FX if policymakers disappoint and it sets a relatively low bar for an euro-positive surprise," its strategists said in a note.
The euro could also take direction from how peripheral bonds and stock markets react to the ECB meeting. If risk appetite improves, the common currency could get a fleeting boost.
"Despite easing and a deeper cut (by the ECB) the euro might actually bounce on improved risk appetite as high as $1.35, especially because positioning suggests strong short-covering may kick in rather easily," said Teppei Ino, a currency analyst at the Bank of Tokyo-Mitsubishi UFJ.
EYES ON THE SUMMIT
Any gains could run into more selling by investors who are still inclined to run bearish positions on the euro.
France and Germany will present a plan to amend the EU treaty to anchor stricter budget discipline, aimed at restoring market confidence and preventing the debt crisis spiralling out of control.
But a senior German official dampened hopes about reaching a solution, saying Berlin is increasingly pessimistic because some governments don't seem to grasp the gravity of the situation.
Some analysts, though, suspect that Germany is purposely trying to lower expectations so that, when there are announcements on Friday, markets will react enthusiastically.
The euro was flat at 1.2375 Swiss francs. It rose to a one-month high of around 1.2443 francs after the Swiss finance minister said authorities could consider negative interest rate and capital control options to curb the franc's strength.
The dollar declined 0.15 percent against a basket of currencies to 78.369 and it was stuck at 77.64 yen.
The Australian dollar was flat on the day as European stock markets rose and that helped it to erase earlier losses made on softer than expected jobs data. The Aussie was at $1.0288, off the day's low of $1.0233.
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