The euro hovered near a four-month high and a key resistance area against the dollar on Thursday, supported by expectations that the European Central Bank is set to pave the way for rate rises later in the year. The ECB left interest rates on hold as expected at its monthly policy announcement, with attention centred on ECB President Jean-Claude Trichet's press conference at 1330 GMT.
The euro has been boosted by expectations Trichet will sharpen his anti-inflation rhetoric as oil prices continue to soar. Some market players think the bank will switch three-month liquidity operations back to capped-limit, variable rate tenders - a largely symbolic step in the phasing out of crisis support that could also help clear the way for a rate hike.
"Trichet should keep a hawkish tone today as data in the eurozone has continued to improve," said Manuel Oliveri, currency strategist at UBS in Zurich. "Better manufacturing and labour market conditions, together with rising commodity prices, are increasing the risks of second round effects. This should keep the euro supported."
Some traders said there is a risk the euro could slip after the ECB meeting since many market players are already counting on the central bank to send strong signals that it will raise rates to counter inflation. The euro was flat against the dollar at $1.3858, hovering near a four-month peak of $1.3890 hit on trading platform EBS on Wednesday. It triggered short-term downside stop-losses through $1.3840 in the European morning but traders said persistent Middle East demand kept the currency well cushioned. Strong demand was expected on approach to $1.3800.
It was within sight of the 76.4 percent retracement of its fall from November to January at $1.3947, as well as its 200-week moving average at $1.3959. The euro has traded below the 200-week average since mid-November. Options traders reported Asian offers ahead of $1.3900 option barriers, with more significant option structures highlighted at $1.3950, said to be expiring Mar. 10.