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Europe Anticipates First ECB Rate Cut in Nearly 5 Years, Stocks Edge Higher

European markets edged higher on Thursday, nearing an all-time high, while the euro strengthened as investors awaited the European Central Bank’s (ECB) widely anticipated decision on its interest rates, expected to mark the first rate cut in nearly five years.

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The pan-European STOXX 600 climbed 0.3% in early trading, while the MSCI’s main world index hovered just shy of a new peak, indicating robust sentiment among traders.

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Investors were buoyed by Wall Street’s recent records, with both the S&P 500 and Nasdaq hitting new highs on Wednesday. The surge was propelled by Nvidia’s ascension to become the world’s second-most valuable company, surpassing Apple and trailing only behind Microsoft.

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The euro continued its upward trajectory, rising 0.1% to approximately $1.0880, adding to its 2% gain over the past month. However, most traders remained cautious, awaiting signals from the ECB’s decision later in the day.

All 82 economists surveyed by Reuters anticipate the ECB to lower its key rate to 3.75% from the current record high of 4.0%. However, the outlook beyond this move remains uncertain, with recent robust economic data casting doubt on the necessity of further cuts this year.

Euro zone inflation exceeded expectations in May, primarily driven by price growth in the services sector, reflecting strong domestic demand. This follows larger-than-expected wage increases in the first quarter, bolstering consumers’ disposable income.

Michael Metcalfe, head of global macro strategy at State Street Global Markets, highlighted the ECB’s decision as one of the most anticipated moves by a central bank. He suggested that the ECB’s forward guidance may become less clear following this decision, making future assessments more challenging for markets and policymakers alike.

The Bank of Canada became the first G7 country to cut rates in this cycle on Wednesday, while the U.S. Federal Reserve is expected to meet next week without making any immediate changes. In contrast, the Bank of Japan, meeting the following week, will deliberate on the timing of rate hikes.

In the bond markets, Germany’s 2-year government bond yield, sensitive to policy rate expectations, showed a slight decline. Meanwhile, 10-year U.S. Treasury yields remained near a two-month low following indications of a cooling U.S. labor market.

With markets pricing in nearly two full 25 basis point Fed cuts this year, attention now turns to the U.S. nonfarm payroll report for May, with economists expecting an increase of 185,000 jobs.

In commodities, Brent crude futures and U.S. West Texas Intermediate crude futures both saw moderate gains, while spot gold and silver prices also rose.

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