TOKYO: The euro edged lower on bond redemption-related selling on Wednesday, with some investors stuck on the sidelines for the U.S. market holiday, while others took positions before a European Central Bank policy meeting on Thursday.
The euro dipped 0.1 percent to $1.2595, still holding above the Tuesday's low of 1.2559. Immediate resistance loomed at 1.2693, a high reached on Friday after European leaders hammered out a deal to tackle the region's debt crisis.
Dealers said that selling coming from Tokyo names linked to bond redemptions was weighing on the euro, pushing it 0.1 percent lower against the yen to 100.31.
The ECB is seen cutting interest rates to a record low on Thursday but may need to do more to satisfy financial markets already starting to wonder about the solidity of last week's summit measures.
A string of weak data out of the United States and Europe has spurred expectations of more stimulus from both the European Central Bank and the Federal Reserve. This has encouraged the market to use the euro and U.S. dollar as funding currencies for carry trades, market players said.
"The consensus right now is a quarter-point cut, but some are already speculating that the bank may surprise with a 0.5 percent move," said Teppei Ino, currency analyst at the Bank of Tokyo-Mitsubishi UFJ.
Analysts' views about the impact of the cut on the euro were mixed, with some expecting the currency to gain on the back of improved risk appetite following loosening of policy, although a lower rate in itself would be euro negative.
The euro hit a one-week high following the euro zone summit at 1.2693, but has shed some of those gains by now, as concerns over Europe's rising unemployment, political disagreements and slowing growth continued to weigh on sentiment.
For now, support for the euro was found between 1.2545 at the 55-day moving average and the 21-day moving average at 1.2565.
Some market players were cautiously optimistic, although suggested major risk events ahead would mean subdued currency moves in the hours ahead.
"Although it is difficult to become too positive given the still very significant downdraft to global growth, officials in Europe have bought some time to get their collective house back in order," said Mitul Kotecha, head of global foreign exchange strategy for Credit Agricole in Hong Kong.
"It is difficult to see much of a market move ahead of the ECB Council meeting and US June jobs report this week," he said.
This is why most market participants expected the euro to consolidate between $1.2560-1.2660 in the lead-up to the ECB meeting. Trading was already lighter than usual and likely to remain so with the United States closed for Independence Day.
Underscoring traders' lack of conviction in the single currency, it fell to a 4-1/2 month low against the Australian dollar around A$1.2201.
The risk-sensitive Aussie also reached two-month highs on the greenback at $1.0371 on stronger-than-expected Australian retail sales data.
Aussie was already supported after the Reserve Bank of Australia kept rates steady on Tuesday and following Friday's deal by European leaders to resolve their debt crisis.