Euro inches lower as eyes shift to ECB meeting

By Patrick Graham

LONDON (Reuters) - The euro retreated from a 3-week high on Tuesday while bets on market volatility stayed close to their highest since June’s Brexit vote ahead of this week's European Central Bank meeting on its quantitative easing program.

The Australian dollar was the morning's biggest loser, dipping as much as 0.4 percent after the Reserve Bank kept interest rates on hold but sounded a note of caution on the pace of growth. AUD=D3

Other major currency pairs traded in a tight range after a rollercoaster ride following Sunday’s Italian constitutional referendum 'No' vote, which saw the euro dip to a 21-month low before rebounding more than 1.5 percent.

The biggest rise in German industrial orders for more than two years in October prodded the single currency higher before a report on the possibility of Italian elections as soon as February unnerved investors.

It was down just 0.2 percent at $1.0743 by 1235 GMT.

"Really eyes are moving to the ECB and we think the governing council will struggle to exceed the relatively dovish expectations being priced into the market," said Valentin Marinov, head of G10 FX strategy with Credit Agricole (PA:CAGR) in London.

The dollar's inability to push on past $1.05 per euro after the Italian vote encouraged those in the market calling for a broader halt to the greenback rally the followed Donald Trump's U.S. election win.

"I have a really hard time staying bullish on the dollar even though we have Italian government uncertainty on top of it all," Indosuez's Geneva-based head of FX and precious metals trading, Davis Hall, said.

"The range is probably still $1.0850 to $1.0250."

One-week implied volatility has retreated from highs of almost 18 percent reached before Italy's vote, but at 13 percent is still almost double recent months' normal levels.

ECB chief Mario Draghi is expected to lay out his plans for quantitative easing after next March at a news conference on Thursday.

At least a six-month extension of the program is now expected but many bank and fund analysts speculate that the bank might announce some sort of reduction or tapering of the monthly bond-buying amounts as part of that move.

Any such change in the direction of the ECB's policymaking would broadly be seen as a euro positive after almost two years of money-printing.

London's City Index Direct chief analyst, Kathleen Brooks, said the euro remained in a strong position within the G10 FX space, even after the Italian vote.

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"As Italy’s banking sector can scrape together some foreign investment, mixed with a sweetened nationalized deal for Monte dei Paschi, then we can’t see how Italy’s political woes can have anything other than a temporary impact," Brooks said.