Market Analysis

On Thursday, the euro firmed slightly ahead of the European Central Bank's (ECB) policy decision, with traders widely anticipating a rate cut. Meanwhile, the dollar softened on renewed expectations of a U.S. Federal Reserve easing cycle within the year.

The Canadian dollar also edged higher, recovering some losses from the previous session. This came after the Bank of Canada became the first G7 nation to cut its key policy interest rate, a move that had been broadly expected. The Canadian dollar was last at C$1.3687 per U.S. dollar.

The euro gained 0.07% to $1.0876 as traders awaited the ECB meeting for guidance on the bank's rate outlook. Although ECB policymakers have indicated plans to reduce borrowing costs this month, they have been vague about the timing of subsequent cuts.

"The Governing Council’s rationale will likely be driven by a stronger-than-expected recovery in business activity and increased confidence that inflation will return to the targeted level," said Henk Potts, a market strategist at Barclays Private Bank. "Beyond the June meeting, we forecast quarter-point cuts in September and December."

In the broader market, the U.S. dollar was under pressure, partly due to easing labor market conditions in the U.S., which bolstered the case for Fed rate cuts this year. Markets have priced in nearly 50 basis points of Fed rate cuts in 2024, with the first expected in September.

Data released on Wednesday showed the U.S. services sector returning to growth in May after a brief contraction the previous month. However, details of the survey indicated that employment in the sector remained in contraction.

"While new orders suggest continued demand, the selected industry comments and continued employment contraction reveal a touch of caution among service providers," noted economists at Wells Fargo.

The New Zealand dollar touched a three-month high of $0.6201 against the U.S. dollar, while the British pound rose 0.09% to $1.2800, and the Australian dollar edged 0.25% higher to $0.6664. The dollar index eased 0.14% to 104.10.

The yen recovered some losses from the previous session, rising 0.4% to 155.50 per dollar. Earlier in the week, the Japanese currency experienced a brief rally due to political uncertainties in emerging markets, prompting investors to unwind yen-funded carry trades.

A carry trade involves borrowing in a low-interest-rate currency and investing in a higher-yielding one. Concerns over constitutional reforms following a strong election victory for Mexico's ruling party led to a squeeze on long peso/short yen positions, a popular carry trade strategy.

The Mexican peso was last little changed against the yen, following a 2.6% gain in the previous session. It had initially fallen roughly 6% against the Japanese currency at the start of the week due to Mexico's election results.

Further supporting the yen were expectations that the Bank of Japan (BOJ) might scale back its massive bond purchases as early as this month to normalize monetary policy. The BOJ's two-day monetary policy meeting is scheduled for next week.

"A greater influence was headlines that the BOJ might look to cut back on bond purchases in the June meeting," said Chris Weston, head of research at Pepperstone. BOJ Governor Kazuo Ueda has kept the possibility of a near-term reduction in the bank's extensive bond-buying program open, stating this week that the BOJ's basic stance is to allow market forces to set long-term interest rates.

"This was almost a momentum play from the Japanese central bank," Weston added. "Adding JPY-positive news flow when funding currencies - JPY and CHF - were already being covered and bought back resulted in the JPY rally gaining additional legs."

Paraphrasing text from "Reuters" all rights reserved by the original author.