August 3, 2012 / 12:12 PM / 5 years ago

Euro recovers from sell-off but outlook clouded

Euro notes are pictured at a bank in this photo illustration taken in Seoul June 18, 2012.Lee Jae-Won

LONDON (Reuters) - The euro rose on Friday, regaining some ground after two days of losses as some market players took a more optimistic view of the European Central Bank's stance on sovereign bond buying that cold help tackle a three-year-old euro zone debt crisis.

Many investors had piled into bets against the euro on Thursday when the ECB dealt it a major setback by not immediately reviving its bond buying program to curb high borrowing costs in Italy and Spain.

The ECB indicated any intervention would not come before September and President Mario Draghi also said intervention would come only if governments activated the euro zone's bail-out funds to join the ECB in buying bonds.

But growing expectations the ECB would ultimately intervene helped the euro, with investors who earlier bet against the single currency being squeezed out of short positions.

Analysts said further near-term gains would depend on U.S, non-farm payrolls data, due at 8:30 a.m. EDT (1230 GMT). The euro was also vulnerable to renewed selling with the euro zone debt crisis unresolved.

"There are a lot of people out there taking a reassessment of what Draghi said yesterday," said Lutz Karpowitz, currency strategist at Commerzbank. "It's rather difficult to believe they will really refrain from stepping into the market."

The euro rose 0.8 percent to $1.2285 after triggering stop loss buy orders at $1.2250, traders said.

It pared losses from a near three-cent dive on Thursday but many market players said the single currency could come under renewed pressure after the U.S. jobs data and test recent two-year lows below $1.2050 in coming days.

A weak number would be likely to increase speculation that the U.S. Federal Reserve would ease policy further and hurt the dollar, while a stronger number would give the greenback a lift and drive the euro lower.

"The euro is headed lower, there is no doubt about that. People are probably waiting for U.S. payrolls and an OK number could see the euro fall towards $1.2040," said Geoff Kendrick, currency strategist at Nomura.

"The ECB's decision was bad for the euro and it will grind lower. We will see more pain before there is more action."

A break below the euro's two-year low of $1.2042 could see it test the 200-month moving average of around $1.2020. Traders cited option barriers at $1.2000 and a drop below that could take the euro to its 2010 low of $1.1876.

STRUCTURAL FLOWS

Recent highs around $1.2390/2406 were expected to be strong resistance for the euro with speculators and long-term investors, such as reserve managers looking to sell the euro on any bounce.

The euro held near a record low against the Australian dollar hit on Thursday, around A$1.1597.

It recovered against the yen ,however, rising 1 percent on the day to 96.238 yen to move further away from a 11-1/2-year low of 94.12 yen hit last month.

"There are structural flows out of the euro to other currencies," said a trader at a Japanese bank. But he added the prospect that the ECB would eventually step in to buy bonds would offer the euro support at lower levels.

The dollar was flat against the yen, trading at 78.26, off Thursday's high around 78.54, though wariness about Japan intervening would keep the yen in check.

Traders said markets were bracing for the U.S. jobs data. Analysts polled by Reuters generally expect the economy to have created 100,000 jobs in July and the jobless rate to stay at 8.2 percent.

A stronger number could temper hopes of more stimulus from the Federal Reserve, which earlier this week signaled it was prepared to act unless the economy staged an unlikely comeback in the next six weeks.

Additional reporting by Anirban Nag, editing by Nigel Stephenson

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