THE yen made broad gains on Thursday (Jan 30) as Japan looks on track to keep raising interest rates while others cut, with the European Central Bank (ECB) seen certain to deliver the latest in a series of policy easings later in the day.
The yen was the notable mover in currency markets, with the US dollar down 0.6 per cent at 154.35 yen and the euro falling a similar amount to 160.62 yen.
The single currency dipped 0.14 per cent against the greenback to US$1.0407 after data showed Germany’s economy shrank more than expected in the fourth quarter.
Meanwhile, the US dollar index was little changed at 107.96 after ticking up slightly overnight when the Federal Reserve paused it easing cycle. The index tracks the US currency against six major peers.
Markets are more than fully priced for the ECB to trim rates by 25 basis points to 2.75 per cent later on Thursday, with even a small chance of a 50-basis-point reduction given the weakness of the eurozone economy.
“The euro area’s inflationary pulse is evaporating, and the risk of a sustained inflation undershoot is material,” warned analysts at ANZ.
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“The complex economic and political challenges facing the euro area’s largest economies increase the onus on the ECB to support growth.”
This is one reason markets are priced for further ECB cuts in March, April and June, with about 90 basis points of easing implied for 2025.
Were ECB president Christine Lagarde to affirm such a dovish outlook at her media conference later on Thursday, it could pile fresh pressure on the euro.
In contrast, Bank of Japan deputy governor Ryozo Himino said on Thursday that Japan’s central bank would continue to raise interest rates if the economy and prices move in line with the bank’s forecasts.
Parsing Powell
The US dollar briefly popped higher overnight when the Fed dropped a reference to making “progress” on inflation, which was taken as hawkish.
Yet, chair Jerome Powell used his media conference to say progress was still being made and rates were “meaningfully” above neutral, implying there was still plenty of scope to cut.
As a result, Fed fund futures still imply around 48 basis points of easing this year, compared to 49 basis points earlier in the week. The next move is not expected until June.
Data on US advance GDP due later on Thursday is expected to show a modest pullback in growth to an annualised 2.6 per cent in the fourth quarter, though forecasts range widely from 1.7 to 3.2 per cent, suggesting some chance of a market-moving surprise.
The Fed’s pause came as Canada and Sweden both cut rates by a quarter-point overnight, but removed guidance on future easing, noting uncertainty about US tariff policy.
Howard Lutnick, US President Donald Trump’s nominee to run the Commerce Department, said on Wednesday that Canada and Mexico could avoid looming US tariffs if they act swiftly to close their borders to fentanyl.
Going the other way on rates, Brazil’s central bank hiked by a full percentage point to 13.25 per cent overnight and flagged more to come. The attraction of such high yields has seen the real rally around 5 per cent since the start of the year.
Elsewhere, the pound was steady at US$1.2446, while the Australian dollar fetched US$0.623, also flat on the day. REUTERS
