* Euro flat on day at $1.2994 <EUR=>
* Euro stalls after hitting 2-mth high vs yen <EURJPY=R>
* Market questions sustainability of European recovery
* Australian dlr slides as soft CPI dents rate expectations
(Adds quote, updates prices)
By Neal Armstrong
LONDON, July 28 (Reuters) - The euro struck a two-month high
against the yen and stayed within reach of an 11-week high
against the dollar on Wednesday, underpinned by robust European
bank earnings and solid economic data.
But analysts said the durability of any recovery in Europe
was questionable.
Risk sentiment had been boosted on Tuesday as European
shares hit a five-week closing high. Two of Europe's top banks,
UBS AG <UBSN.VX><UBS.N> and Deutsche Bank AG <DBKGn.DE><DB.N>,
posted results that reassured investors following last week's
regulatory stress tests. []
A rise in German consumer sentiment on Tuesday, following on
from a strong Ifo and PMI surveys the previous week, had also
boosted European recovery hopes.
"Clearly there's a risk-on situation as the market is
starting to believe there's a European recovery in place, but
there is thin liquidity behind it," said Neil Mellor, currency
strategist at Bank of New York Mellon.
"We have doubts over the recovery, particularly as the U.S.
economy continues to struggle," he said.
Asian equity markets closed with strong gains, as Japan's
Nikkei 225 Index <> and China's Shanghai Stock Exchange
<> both jumped more than 2 percent on Wednesday, but
European markets struggled to gain momentum <>.
"The market is more relaxed but it is starting to question
the improvement we have seen in risk appetite over recent days.
There are still potential headwinds in Europe from austerity
measures, possible haircuts or even sovereign defaults," said
Jane Foley, research director at Forex.com.
By 1114 GMT, the euro was down slightly on the day against
the yen <EURJPY=R> at 114.00 yen, easing from a two-month high
of 114.74 yen on trading platform EBS in early European dealing.
Technical analysts said the picture was bullish, as euro/yen
continued to make gains within its Ichimoku cloud. The top of
the cloud was seen as key resistance at 117.86 yen.
The euro stayed within touching distance of an 11-week high
against the dollar <EUR=> of $1.3045 hit the previous day,
hovering around $1.3000.
Traders said an option barrier at $1.3050 would need to be
taken out for a move towards Fibonacci resistance at $1.3125,
which is a 38.2 percent retracement of the December-June move.
Large option expiries were reported by traders at $1.3000
and $1.2850, potentially slowing the euro's gains on the day.
AUSSIE HURT BY CPI DATA
Key euro interbank lending rates continued to rise on
Wednesday amid expectations banks would continue scaling back
use of ECB loans. []
The ECB allotted 23 billion euros in a three-month tender
operation, down from the previous month's allocation of 131.9
billion. []
"The market took (the operation) in its stride as the
weekend's stress tests have clearly allayed fears on the
fragility of the financial system for the time being," said Adam
Cole, global head of FX strategy at RBC Capital Markets.
Portugal sold 1.28 billion euros in government bonds,
slightly above its indicative offer, with yields dropping on the
shorter bond for the first time in months. []
The Australian dollar slid 0.7 percent to $0.8949 <AUD=D4>,
having dropped from a 11-week high of $0.9069 the previous day.
Australian consumer prices rose much less than expected last
quarter and core inflation slowed to its lowest in more than
three years. []
(Additional reporting by Tamawa Desai; editing by Stephen
Nisbet)
