LONDON (Reuters) - Robust euro zone factory data lifted the single currency off a six-week low on Monday and boosted shares, but did little to shift expectations that the European Central Bank was about to signal a policy easing.
A drop in the currency bloc's inflation to well below the ECB's target level and firm money market rates have convinced many investors a shift in ECB policy is on the way and looks set to support prices until the central bank meets on Thursday.
"The bias remains for it to ease, as markets drive the ECB to address disinflationary pressures building in the euro zone," said Jeremy Stretch, head of currency strategy at CIBC World Markets.
The euro touched a fresh six-week low early on Monday as the rate cut talk spread to Asia, though by midday it had recovered to be up 0.2 percent at $1.3510, helped by the release of positive manufacturing Purchasing Managers' Index (PMI) surveys.
The euro zone PMI showed factory production in the 17-nation bloc had accelerated as expected in October, though it remained weak compared to historical levels. <ID:L5N0IP15N>
"On past performance it is still only consistent with pretty weak industrial production growth. It's rising - but it's hardly at booming levels," said Ben May at Capital Economics.
Europe's broad FTSEurofirst 300 index .FTEU3 nudged up slightly after the surveys for a gain 0.4 percent on the day as it closes in on last-week's five-year high. .EU
The better economic outlook was also expected to lead to a firmer start when Wall St opened, though investors were expected to be in a cautious mood ahead of Friday's key jobs data. .N
A weekend report pointing to expansion in China's giant service sector had earlier done little to invigorate Asian markets. MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS eased 0.2 percent while Tokyo markets were closed for a holiday.
The MSCI world equity index .MIWD00000PUS, which tracks shares in 45 nations, was 0.1 percent higher.
In fixed income markets, bets on an easing in euro zone rates lifted both core and lower-rated euro zone bonds, though there remained a debate among analysts over which policy tool the ECB might choose to use. <GVD/EUR>
In addition to a cut in its main refinancing rate, now at 0.5 percent, the ECB could reduce the deposit rate to below zero, which would have a bigger effect on money markets. It may even promise of another long-term refinancing operation to ensure banks have plentiful liquidity.
"I'd be surprised if they don't do something before the year-end," said Simon Smith, chief economist at FXPro. "On balance, I'd be thinking they were more likely to do some thing on the liquidity side where it would be more effective."
The Bank of England also holds it policy meeting on Thursday and is expected to stay on hold following a run of improving UK economic data.
Meanwhile markets remain highly sensitive to any clues on when the Federal Reserve might scale back its bond-buying after upbeat U.S. factory data last week stirred talk of a tapering in December, rather than in March as many had been anticipating.
Dallas President Richard Fisher, took the opportunity of a speech in Sydney on Monday to lambast Washington for making the Fed's task much harder.
"The inability of our government to get its act together has countered the pro-cyclical policy of the Federal Reserve," Fisher told business conference.
Fed Governor Jerome Powell and the heads of the St. Louis and Boston Feds are due to speak later in the day.
However, the main event this week will be Friday's U.S. payrolls report which is expected to show a modest rise of just 125,000 in October, amid uncertainty about the economic impact of last month's government shutdown in Washington. ECONUS
A soft report, and particularly any rise in the jobless rate, would argue against an early Fed tapering.
Also of note will be the U.S. gross domestic product (GDP) on Thursday, expected to show annual growth of 1.9 percent in the third quarter, down from 2.5 percent the previous quarter.
Commodity prices were held in check by the firm dollar.
Spot gold was trading at $1,316 an ounce, having fallen from a peak of $1,361.60 last week. Copper shed 0.6 percent to $7,200 a metric ton.
Oil prices steadied following last week's losses as a firmer dollar and ample supplies outweighed concerns about a drop in Libyan crude exports.
Brent crude for December delivery was up 56 cents at $106.48 a barrel. U.S. oil for December delivery was 29 cents firmer at $94.90.
Additional reporting by Emelia Sithole-Matarise and David Brett. Editing by Ron Askew.