* Investors expect ECB to be more dovish than Fed
* Sterling near two-year lows ahead of Johnson speech
* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh
By Olga Cotaga
LONDON, July 24 (Reuters) – The euro fell to a two-month low against the dollar on Wednesday, hit by weak economic data and speculation that the European Central Bank may start easing policy as soon as this week.
Money markets are pricing in a 45% chance of a 10 basis point cut on Thursday. The ECB could also signal further reductions the road or a fresh round of quantitative easing, said Esther Maria Reichelt, an analyst at Commerzbank.
“It won’t be just about the (possible) rate cut,” she said.
Euro overnight implied volatility gauges rose to their highest since mid-December at 11.6 vol, while the common currency weakened by 0.2% to $1.1127, the lowest since May 30.
The euro has shed 2.1% of its value this month as investors priced in the probability of euro zone borrowing costs pushing further into negative territory.
This view was enhanced by German composite flash purchasing managers’ index falling unexpectedly to 51.4 in July from 52.6 in June, below a Reuters poll of a slight decline to 52.3. French composite PMI was also weaker than expected.
A broadly stronger dollar also contributed to the euro’s woes.
The U.S. currency firmed after Washington reached a deal on Monday to lift government borrowing limits, which analysts said could serve as a reason for the U.S. Federal Reserve not to cut interest rates aggressively and support the dollar.
Its index against a basket of currencies was flat at 97.66, having edged up to a five-week high of 97.76 earlier following gains of nearly 0.5% the previous day.
“In addition to the euro’s weakness ahead of the ECB meeting, the dollar is supported as market participants continue to discount the likelihood of the Fed cutting rates by 50 basis points at next week’s FOMC (Federal Open Market Committee) meeting,” said Ayako Sera, senior market economist at Sumitomo Mitsui Trust.
The pound traded near a two-year low after Boris Johnson on Tuesday won the contest to be Britain’s next prime minister, focusing investor attention on prospects of a no-deal Brexit.
Sterling was last up 0.1% at $1.2452, not far from the 27-month low of $1.2382 it hit last week. (Reporting by Olga Cotaga Additional reporting by Shinichi Saoshiro in TOKYO; editing by John Stonestreet)