LONDON: The euro sank to a new two-month low against the dollar on Thursday as investors waited for the European Central Bank to signal another round of monetary easing, including a possible rate cut and the resumption of bond purchases.
The slide was exacerbated by a bigger-than-expected fall in the German Ifo index of current business conditions to 99.4 in July from 100.8 in June. A Reuters poll of economists had expected a decline to 100.4.
"I doubt that anything the ECB does or says provides much comfort" for the beleaguered euro, said Kit Juckes, macro strategist at Societe Generale.
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.
Hedge funds kept short positions on the euro at $4.39 billion in the week to July 16, around levels seen early this year, according to the Commodity Futures Trading Commission.
However, some analysts expect the central bank to be way less dovish and only tweak its forward guidance by re-introducing the easing bias.
"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.
A Deutsche Bank index showed investors have been ramping up call options holdings in euro/dollar, pushing the amount of call options to the highest since early 2018, which serves as evidence that some market participants see the euro strengthening.
"This is an ECB meeting where the market seems unprepared for EUR/USD weakness," said George Saravelos, a forex strategist at the German lender.
Those opposing views in the market were reflected in euro overnight implied volatility jumping to 12.73, its highest since December.
The euro dropped earlier to $1.1122, the lowest it's been since May 30, trading down 0.1% on the day at $1.1128. It has shed more than 2% of its value so far this month. 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 1.0963 against the common currency and was last at 1.0978. The spike in the franc bolstered expectations that the Swiss could intervene to weaken the currency to protect their export-reliant economy.
Sebastien Galy, macro strategist at Nordea Asset Management, said he expected the Swiss National Bank and Danish central banks to cut rates in September and he saw "a decent chance that the SNB already reacts post today's ECB meeting."
Elsewhere, expectations of lower interest rates sent the Australian dollar to a new two-week low of $0.6963.
The pound remained below $1.25 and not far from the 27-month low it reached last week, last trading slightly lower at $1.2472 as new Prime Minister Boris Johnson assembled his largely Brexiteer cabinet.
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