(REUTERS) Money markets stuck to expectations of a rate cut this year after the European Central Bank on Thursday neither signalled further monetary easing nor eliminate the possibility of more stimulus.

At a press conference in Spain, Draghi painted an uncertain picture of the euro zone's economy, saying while it was likely to improve this year there were risks of a decline. He said more time was needed to see the impact of cheap 3-year financing on the real economy and that any exit strategy remained premature.

Euribor futures gave up gains after the comments, as traders took profit on previously held positions. But by late trade, they had come off their lows as some bought back into the dips.

"They kept their options opened but they didn't give really any indication, and they don't appear to be in any hurry to change policy," Nikolaos Panigirtzoglou, strategist at JPMorgan said.

Data this week painted a bleak picture of the manufacturing sector in theeuro zone, while double-digit unemployment fueled concerns that austerity in Europe was choking an already sluggish economy.

Euribor interest rate futures fell as much as 3.5 ticks across the 2013 and 2014 strip after Draghi's comments having traded as much as 2 ticks higher when the press conference started.

By late trade, Euribor futures had come off their lows although they were still 0.005 to 2 bps lower on the day.

Alessandro Giansanti, strategist at ING said, said the June contract was pricing in a close to fifty percent chance of a 25 basis point that month, little changed compared to before the press conference.

DETERIORATING BACKDROP

One trader said the worsening economic situation in the euro zone had money markets players betting on more monetary easing from the ECB, be it via a cut in interest rates, in the deposit facility rate or by increasing the maturity on long-term refinancing operations.

The ECB injected one trillion euros worth of cheap 3-year cash in December and February, providing highly indebted countries with some breathing space as the excess liquidity helped limit a rise in peripheral bond yields.

"The reaction was fairly predictable in that people are happy to be long of Euribor futures and as a result, because nothing happened today, the pull-back was bought quite quickly," said the trader.

"Today's press conference probably didn't surprise us in that nothing happened in terms of changing the monetary stance, but they certainly didn't close any doors."

Eonia forwards were suggesting that the overnight rate be at 0.29-0.24 by November compared to 0.34 percent currently. The trader said that suggested a 30 percent chance of a 25 bps interest rate cut by that time.

But Panigirtzoglou said the Eonia rate also indicated the high probability of a cut in the rate of the deposit facility currently priced in by the market, little changed from before the press conference.

"I think the expectation for an ECB cut and a cut in the deposit facility will stay for as long as there is funding stress and the economic headwinds remain as intense as they are," Panigirtzoglou added.

(REUTERS) The euro slid against the dollar on Monday and was on track for its worst month since December, pressured by nagging euro zone stresses as German retail sales were softer than expected and Spain slipped back into recession.        

Investors were also wary of buying euros before weekend elections in France and Greece and a European Central Bank meeting this week that could further knock sentiment on the euro zone common currency.  

The yen was one of the big gainers of the day, hitting a more than two-month high against the dollar and a two-week peak  versus the euro, as investors sought the Japanese currency's safety on global economic worries.    

"All the news out of Europe is getting worse, although we're still in a range," said Win Thin, senior currency strategist, at Brown Brothers Harriman in New York. "I think the European news and the generally weak U.S. data are sort of feeding into this risk-aversion mode."     

The euro failed to gain traction versus the dollar despite signs the U.S. economic recovery was losing momentum and concerns about possible further U.S. monetary easing. Data on U.S. spending for March and business activity for the U.S. Midwest released on Monday reinforced that view. 

A report showed U.S. household spending rose 0.3 percent, below the consensus forecast of a 0.4 percent increase. Taking into account inflation, spending rose 0.1 percent.

Adding to the weak U.S. view was a drop in Midwest business activity. The Institute for Supply Management-Chicago's business index fell to 56.2 in April, below market forecasts of 61.0. The reading was 62.2 in March.

In midday New York trading, the euro fell 0.2 percent to $1.3228 against the dollar as investors were wary of pushing it back toward a near 1-month high of $1.3270 on Friday. However, it stayed just above support at its 55-day moving average at about $1.3205.

On the month, the euro was down 0.9 percent, its worst performance since December last year. 

Markets are on tenterhooks, awaiting the second round of the French presidential vote and elections for a new Greek parliament this weekend.           

Data showing Spain slipping into recession also highlighted concerns that harsh austerity measures in deeply indebted smaller euro zone economies were hampering growth.    

This left the euro struggling to benefit from weakness in the dollar, which earlier touched 78.638 against a basket of currencies. The dollar fell to its lowest since March 1 before recovering to trade at 78.835, up 0.2 percent on the day.

The euro also dropped to a two-week low against the yen at 105.45 yen and last traded at 105.56, down 0.8 percent. Investors expected the Japanese currency to benefit from safe-haven demand in view of Europe's debt problems.     

German bond yields hovered near record lows and the euro held steady on Thursday ahead of bond auctions by Spain and France that are key to investor confidence in Europe's ability to tackle growing economic and fiscal problems.

Markets have grown jittery about the euro zone's capacity to prevent Spain's fiscal woes in particular from spreading to other vulnerable peripheral euro zone economies, despite massive liquidity injections by the European Central Bank.

Spain's auction of a relatively modest 2.5 billion euros of two- and 10-year bonds will be the most closely watched after Madrid abruptly relaxed its deficit targets last month, sending longer term bond yields over six percent.

"The Spanish bond auction will be well supported," said Gerry Celaya, chief strategist at Red Tower Research. But he sees the 10-year bond yields creeping back above 6 percent in the longer term as appetite for the debt fades, and this may see yields in other shaky peripherals such as Italy drift higher.

The euro was basically unchanged at $1.3130, while the dollar firmed against a basket of major currencies, pushing spot gold down 0.1 percent to $1,639.46 an ounce.

The MSCI world equity index was little changed, up 0.1 percent at 326.71, after uninspiring earnings from tech bellwethers IBM and Intel saw Asian stock markets end flat.

France is seeking to raise around 11 billion euros as investors grow increasingly concerned about the outcome of the two-round presidential election that starts on Sunday, which could result in a softening of tough austerity measures if the Socialist candidate Francois Hollande is successful.

The euro lost some ground on Tuesday, a day after short-covering helped it pull away from two-month lows against the dollar, and remained vulnerable ahead of a Spanish bond auction as euro zone debt jitters showed no signs of abating.

Spain is set to see its borrowing costs leap when it sells short-term bonds after concerns over its deficit and banking sector pushed longer term risk premiums above 6 percent and drove the cost of insuring its debt to a record high.

The developments fuelled concerns Madrid might fail to meet deficit targets as the country acknowledged it has probably tipped into its second recession since 2009. That would raise the risk of it being pushed into seeking an international bailout.

The common currency shed 0.2 percent to $1.3110, having aggressively pulled away from a nadir at $1.2995. Apart from short-covering, traders cited euro buying by European firms and repatriation of funds by euro zone banks as factors helping the pull back.

"There's a lot uncertainty about Spanish yields, so of course if something goes off script at the auction today the euro may come under pressure again," said Bank of Tokyo-Mitsubishi UFJ analyst Teppei Ino.

"That said, the support around $1.30 is very strong and it held overnight, so I would expect the currency won't be able to break it just yet."

Traders said there were stop-loss sell orders below $1.2970 and were eyeing an strong support at $1.2954, at the 61.8 percent retracement of the euro's climb from its January low to a peak in February.

The influential ZEW German sentiment index due at 0900 GMT could also swing the market in the event-packed day. It is seen dropping, to 20.0, from 22.3 in March - its highest level since June 2010.

"Even if ZEW comes well above expectations, it's really hard to find a reason to happily buy the euro at these levels, especially ahead of another Spanish auction" said Koji Fukaya, chief currency strategist in Credit Suisse in Tokyo.

Spain holds auctions of two-year and 10-year bonds on Thursday. Any sign that 10-year yields are heading closer to 7 percent - a level regarded as unsustainable - could prompt further euro weakness.

Compounding Spain's fiscal woes, its banks borrowed a record 316.3 billion euros ($412 billion) from the ECB in March, almost double the previous month's total, as they remained virtually excluded from wholesale credit markets.

"Investors are beginning to question if Spain's fiscal austerity measures could be sustainable as its economy deteriorates, while sluggish growth would push housing prices lower and raise the risk of nonperforming loans ballooning," said Takao Hattori, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.

Adding to uncertainty, South Korean Vice Finance Minister Shin Je-yoon said the Group of 20 nations will struggle to reach a deal on boosting the International Monetary Fund's resources at a finance ministers' meeting this week.

Against the yen, the euro was 0.2 percent down at 105.43 yen , h aving hit the trough of 104.63 yen on Monday, a level not seen since mid-February.