The euro maintained a narrow trading range on Thursday after the European Central Bank (ECB) announced a rate cut, moving from record highs. The market had anticipated the ECB’s decision for months, resulting in minimal reaction as the news was already priced in.
The euro edged up 0.04% to $1.0872, close to a two-and-a-half month high of $1.0916 achieved earlier in the week. Against the Japanese yen, the euro gained 0.10%, trading at 169.895 yen.
The dollar index, which compares the U.S. dollar to a basket of other currencies including the yen and euro, rose 0.07% to 104.31. This slight increase followed a report indicating that applications for unemployment benefits in the U.S. were higher than expected, totaling 229,000.
Inflation in the eurozone has decreased from over 10% in late 2022 to just above the ECB’s 2% target, mainly due to lower fuel costs and resolved post-pandemic supply issues. However, this progress has recently stalled, making the outlook for further ECB rate cuts uncertain, especially as eurozone inflation appears to be persistent, similar to trends in the United States.
With the ECB’s rate cut now finalized, market focus shifts to the upcoming U.S. payroll data release on Friday.
The ECB’s actions were widely expected, so the market adjustments for the 25 basis point cut haven’t significantly impacted the swaps market,” said Marc Chandler, Chief Market Strategist at Bannockburn Global Forex in New York. He noted that it is typical for the dollar to weaken ahead of the monthly employment report and then rebound afterward.
Thursday’s market discussions were dominated by central bank activities. The Canadian dollar strengthened slightly following the Bank of Canada’s expected rate cut, trading at C$1.3686 per U.S. dollar.
Investors are also considering the implications for the Federal Reserve, given this week’s U.S. data indicating moderating employment growth alongside increased service sector activity. The Federal Open Market Committee is not expected to cut rates in its meeting next week, but markets are pricing in nearly 50 basis points of Fed rate cuts this year, likely starting in September.
The euro also rose 0.23% against the pound, trading at 85.18 pence, but remained towards the lower end of its recent range. Against the dollar, sterling slipped slightly to $1.2779.
YEN RISES
The yen strengthened to 155.96 per dollar as investors responded to remarks from Bank of Japan Governor Kazuo Ueda about reducing the central bank’s bond buying, signaling a potential move away from significant monetary stimulus. These comments come ahead of the Bank of Japan’s two-day policy meeting next week.
“This was a momentum play from the Japanese central bank, adding JPY positive news flow when funding currencies like JPY and CHF were already being covered and bought back,” said Chris Weston, head of research at Pepperstone. This resulted in the yen rallying further.
Earlier in the week, the yen saw a brief surge as investors unwound yen-funded carry trades following Mexico’s ruling party’s election victory, which raised concerns about constitutional reform.
In the carry trade, investors borrow in low-interest currencies like the yen and invest in higher-yielding currencies. The Mexican peso slightly declined against the yen after a 2.6% gain in the previous session. At the start of the week, it had dropped roughly 6% against the yen following Mexico’s election results.
In the cryptocurrency market, Bitcoin fell 0.38% to $71,024.00, while Ethereum declined 0.8% to $3,832.90.
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