By Richard Hubbard
LONDON (Reuters) - Increased prospects of a European Central Bank interest rate cut this year sent the euro to a six-week low on Monday and boosted the region's share markets, which extended gains on robust manufacturing data.
A plunge in the currency bloc's inflation to well below the ECB's target level and pressure on money market rates hardened expectations last week for a shift in ECB policy and look set to support prices until the central bank meets on Thursday.
"Clearly market expectations turned recently in favor of a potential (ECB) rate cut, probably not this week but there's a high probability it could be delivered in December," said Patrick Jacq, a strategist at BNP Paribas in Paris.
Europe's broad FSEurofirst 300 index (.FTEU3) rose 0.4 percent in early deals to be back near last-week's five-year high. The index is up about 14 percent this year.
Data showing factory activity picked up in Spain and Italy in October, following a weekend report that expansion in China's giant service sector was gathering momentum, added to the positive tone, though it mainly served to confirm market expectations.
Earlier in Asia, investors shrugged off the Chinese data, preferring to wait for the outcome of the ECB meeting and the U.S. monthly jobs data out at the end of the week.
MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> eased 0.2 percent while Tokyo markets were closed for a holiday. The MSCI world equity index <.MIWD00000PUS>, which tracks shares in 45 nations, was 0.1 percent higher.
"I expect this to be a positive week for equities. European economic numbers have been good and there are expectations that Friday's U.S. non-farm payrolls data could surprise on the positive side," said Christian Stocker, equity strategist at UniCredit.
MORE CASH OR LOWER RATES?
In currency markets, the euro slipped to its lowest level since Sept 18 at $1.3443 during the Asian session, having suffered its biggest drop in over a year last week. It trimmed its losses when Europe opened to settle around $1.3510.
The bets on an easing in euro zone rates also lifted both core and lower-rated euro zone bonds, though there remained a debate among analysts over whether the bank would choose to cut rates or stimulate financial markets with more cash. (GVD/EUR)
"I'd be surprised if they don't do something before the year-end," said Simon Smith, chief economist at FXPro. "On balance, I'd be thinking they were more likely to do something on the liquidity side where it would be more effective."
The Bank of England also holds it policy meeting on Thursday and is expected to stay on hold following a run of improving UK economic data.
Other major currencies were mostly quiet with the dollar well supported by last week's upbeat U.S. factory data, which stirred speculation the Federal Reserve might scale back its bond-buying in December, rather than in March as many in the market had been anticipating.
Four Fed officials were to make speeches on Monday, starting with Bank of Dallas President Richard Fisher in Sydney. Fed Governor Jerome Powell and the heads of the St. Louis and Boston Feds are due later in the day.
The other big event for markets will be Friday's U.S. payrolls report which is expected to show a modest rise of just 125,000 in October, amid uncertainty about the economic impact of last month's government shutdown in Washington. (ECONUS)
A soft report, and particularly any rise in the jobless rate, would argue against the Fed tapering its stimulus in December.
Also of note will be the U.S. gross domestic product (GDP) due on Thursday, expected to show annualized growth of 1.9 percent in the third quarter, down from 2.5 percent the previous quarter.
Commodity prices were held in check by the firm dollar.
Spot gold was trading at $1,314.60 an ounce, having fallen from a peak of $1,361.60 last week. Copper shed 0.6 percent to $7,200 a tonne.
Oil prices steadied following last week's losses as a firmer dollar and ample supplies outweighed concerns about a drop in Libyan crude exports.
Brent crude for December delivery was up 56 cents at $106.48 a barrel. U.S. oil for December delivery was 29 cents firmer at $94.90.
(Additional reporting by Emelia Sithole-Matarise and David Brett. Editing by)