Euro Remains Steady as ECB Cuts Rates: Markets Await U.S. Payroll Data
NEW YORK/LONDON/SINGAPORE, June 6 (Reuters) – On Thursday, the euro remained in a narrow trading range following the European Central Bank’s (ECB) decision to lower interest rates from their record highs. The highly anticipated move saw the euro fluctuate briefly before stabilizing, with the outcome largely anticipated by the markets.
By midday, the euro edged up by 0.04% to $1.0872, slightly below the two-and-a-half month high of $1.0916 achieved earlier in the week. Against the yen, the Japanese currency increased by 0.10% to 169.895 yen. The dollar index, which tracks the U.S. dollar against a basket of major currencies, including the yen and the euro, rose by 0.07% to 104.31, showing minimal reaction to a report indicating higher-than-expected unemployment benefit applications in the U.S., which stood at 229,000 last week.
ECB Rate Cut Amid Inflation Concerns
Inflation within the 20 countries using the euro has dropped significantly, from over 10% in late 2022 to just above the ECB’s 2% target in recent months. This decrease is primarily due to reduced fuel costs and a normalization of supply chains post-pandemic. However, recent months have seen a stagnation in this progress. What initially appeared to be the beginning of a significant ECB easing cycle has now become uncertain, as eurozone inflation shows signs of persistence, similar to trends observed in the United States.
With the ECB’s rate cut now behind them, market participants are focusing on the upcoming U.S. payroll data due on Friday.
Market Reactions and Future Expectations
Marc Chandler, chief market strategist at Bannockburn Global Forex in New York, noted that the ECB’s actions were largely expected, resulting in minimal shifts in the swaps market after the 25 basis point cuts. Chandler highlighted that it is common for the dollar to weaken ahead of the monthly employment report, only to strengthen again afterward.
The Canadian dollar showed slight gains following the Bank of Canada’s anticipated rate cut on Wednesday, with the currency last trading at C1.3686 per U.S. dollar. Investors are now assessing the implications of recent U.S. data, which indicates a slowdown in employment growth alongside an uptick in service sector activity. These factors will influence the Federal Reserve’s decisions at its upcoming Federal Open Market Committee meeting next week, although no rate cuts are expected at this time. The markets are currently anticipating nearly 50 basis points of Fed rate cuts this year, likely starting in September.
The euro also gained 0.23% against the British pound, trading at 85.18 pence, though it remained towards the lower end of its recent range. Conversely, sterling saw a slight decline against the dollar, down to $1.2779.
Yen’s Movements and Bank of Japan’s Strategy
The Japanese yen held firm at 155.96 per dollar, following remarks from Bank of Japan Governor Kazuo Ueda. Ueda suggested that it might be appropriate to reduce the central bank’s bond-buying activities as the bank considers exiting its extensive monetary stimulus program. These comments come ahead of the BOJ’s two-day monetary policy meeting next week.
Chris Weston, head of research at Pepperstone, described the yen’s recent performance as a “momentum play” by the Japanese central bank. Positive news flow for the yen coincided with a period when funding currencies like the yen and Swiss franc were being repurchased, resulting in the yen rally gaining momentum. Earlier in the week, the yen experienced a brief rally as investors unwound positions in yen-funded carry trades following a strong election victory for Mexico’s ruling party, which raised concerns about potential constitutional reforms.
This led to a squeeze on long peso/short yen positions, which had been popular in carry trades. In carry trades, investors borrow in a low-interest-rate currency and invest in a higher-yielding one. The Mexican peso saw a fractional decline against the yen after a 2.6% gain in the previous session. It had dropped roughly 6% against the Japanese currency at the start of the week following Mexico’s election results.
Cryptocurrency Market
In the cryptocurrency market, Bitcoin fell by 0.38% to $71,024.00, while Ethereum declined by 0.8% to $3,832.90. The crypto market showed typical volatility, reflecting broader uncertainties in the financial landscape.
Conclusion
As the ECB’s anticipated rate cut settles into the market, attention shifts to forthcoming U.S. payroll data, which will provide further insight into economic conditions and potential monetary policy adjustments by the Federal Reserve. Meanwhile, movements in the yen and developments in the cryptocurrency market continue to capture investor interest, adding layers of complexity to the current financial environment
