The euro stabilized somewhat on Thursday ahead of the European Central Bank’s (ECB) policy decision, where traders view a rate cut as almost certain, while the dollar weakened on renewed bets of a Federal Reserve easing cycle US Reserve expected this year.
The Canadian dollar rose slightly, paring some 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. The latest price was 1.3679 dollars per dollar.
The euro gained 0.17% to $1.0887 as traders looked to the ECB meeting later in the global day for guidance on the central bank’s rate outlook.
While policymakers signaled intent to lower borrowing costs this month, they remained coy about the timing of subsequent cuts.
“The Governing Council’s motivation is likely to be driven by a stronger-than-expected recovery in (business) activity and greater confidence that inflation will return to its target level,” said market strategist Henk Potts at Barclays Private Bank.
“Beyond the June meeting, we expect we could see quarter-point cuts in September and December.”
In the broader market, the U.S. dollar bucked the trend, weighed down in part by easing labor market conditions in the United States, which strengthened the case for a rate cut by the Fed this year.
Markets have been anticipating nearly 50 basis points of Fed rate cuts this year, the first of which is expected to come in September.
Data on Wednesday showed the U.S. services sector returned to growth mode in May, after a brief contraction the previous month, although survey details indicated employment remained in contraction territory.
“While new orders suggest continued demand, select industry commentary and continued contraction in employment reveal a touch of caution among service providers,” Wells Fargo economists said.
Against the US dollar, the kiwi hit a three-month high of $0.6215, while the pound rose 0.05% to $1.2795 and the Aussie rose 0.21% to 0 ,66615 dollars.
The dollar index fell 0.11% to 104.14.
THE YEN RISES
Elsewhere, the yen was largely stable on the day, rising 0.2% to 155.78 per dollar.
The Japanese currency had a brief rally earlier in the week as investors eliminated positions in yen-funded carry trades following a strong election victory for Mexico’s ruling party, which sparked concerns about the contested constitutional reform.
This has resulted in a squeeze on long peso/short yen positions, which have been favored by carry trades.
In a carry trade, the investor borrows the currency of a country with low interest rates and invests the proceeds in a higher-yielding currency.
The peso rose 0.2% against the yen, extending its 2.6% gain in the previous session. It had fallen about 6% against the Japanese currency earlier in the week, in the wake of Mexico’s election results.
Contributing to the yen’s gains were expectations of a reduction in massive bond purchases by the Bank of Japan (BOJ) as early as this month, with a view to normalizing monetary policy.
BOJ Governor Kazuo Ueda said on Thursday that it would be appropriate to reduce the central bank’s bond purchases as it moves towards an exit from massive monetary stimulus. His comments come ahead of the BOJ’s two-day monetary policy meeting next week.
“The biggest influence was reports that the BOJ may look to reduce bond purchases at the June BOJ meeting,” said Chris Weston, head of research at Pepperstone.
“It was almost a momentum play by the Japanese central bank – i.e., adding positive JPY news flow when the funding currencies – JPY and CHF – were already covered and repurchased, and the result was a JPY rally gaining further legs,” Weston said.
