* 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 EUR=EBS , 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. index against a basket of currencies .DXY 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.