The euro strengthened slightly on Thursday ahead of the European Central Bank (ECB) decision, where traders see a rate cut as almost certain, while the dollar retreated on renewed bets on an easing cycle from the US Federal Reserve expected this year.
The Canadian dollar rose slightly, paring losses from the previous session, after the Bank of Canada became the first G7 country to cut its key interest rate, as was widely expected. It stood at 1.3687 Canadian dollars per dollar.
The euro gained 0.07% to $1.0876 as traders looked forward to the ECB meeting later in the day for guidance on the bank’s rate outlook.
While policymakers signaled their intention to reduce borrowing costs this month, they remained reticent about when further reductions might take place.
“The Governing Council’s reasoning is likely to be driven by a stronger-than-expected recovery in (business) activity and increased confidence that inflation will return to target levels,” market strategist Henk Potts said. at Barclays Private Bank.
“Beyond the June meeting, we anticipate quarter point reductions in September and December.
In the broader market, the U.S. dollar was lower, in part because of easing U.S. labor market conditions, which strengthened the case for a Fed rate cut this year .
Markets have priced in nearly 50 basis points of Fed rate cuts this year, with the first expected in September.
Data on Wednesday showed the U.S. services sector returned to growth in May after a short-lived contraction the previous month, although survey details indicated employment remained in contraction territory .
“While new orders suggest continued demand, select industry commentary and continued employment contraction reveal some caution among service providers,” Wells Fargo economists said.
Against the US dollar, the kiwi touched a three-month high of $0.6201, while the British pound rose 0.09% to $1.2800 and the Australian gained 0.25%. at $0.6664.
The dollar index fell 0.14% to 104.10.
THE YEN IS SOAR
The yen recovered some of its losses from the previous session and rose 0.4% to 155.50 per dollar.
The Japanese currency experienced a brief rebound at the start of the week following turbulence in emerging markets due to political concerns, which pushed investors to unwind their positions in carry trades financed by the yen.
In a carry transaction, an investor borrows in the currency of a country where interest rates are low and invests the proceeds in a higher-yielding currency.
The strong electoral victory of Mexico’s ruling party has sparked concerns over disputed constitutional reform, leading to a tightening of long positions in the peso and short positions in the yen, which is one of the preferred currencies for trading. portage.
The peso was little changed against the yen, following a 2.6% gain in the previous session. It had fallen about 6% against the Japanese currency earlier this week, in the wake of Mexico’s election results.
Expectations by the Bank of Japan (BOJ) to scale back its massive bond purchases starting this month as it strives to normalize monetary policy contributed to the yen’s gains.
The BOJ will hold its two-day monetary policy meeting next week.
“Headlines indicating that the BOJ may consider reducing its bond purchases at its June meeting had a greater influence,” said Chris Weston, head of research at Pepperstone.
BOJ Governor Kazuo Ueda maintained the possibility of a near-term reduction in the bank’s massive bond purchases by saying this week that the BOJ’s basic position is to let market forces set long-term interest rate.
“It was almost a momentum play by the Japanese central bank – i.e. adding a stream of positive news on the yen while the funding currencies – the yen and the franc Swiss – were already covered and repurchased, and the result was that the yen rally gained momentum,” Mr. Weston said.
