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Euro Gains Ahead of ECB Decision; Yen Strengthens

The euro showed slight strength on Thursday ahead of the European Central Bank’s (ECB) policy meeting, where investors anticipate remarks on the future path of interest rates, with a cut at this meeting largely anticipated.

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Central banks remained in focus, particularly after the Bank of Canada’s Wednesday meeting, where it cut its key policy interest rate as expected. This led to a slight firming of the Canadian dollar, which was last trading at C$1.3679 per dollar.

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Investors were also considering the implications of recent U.S. data indicating moderating employment growth, alongside a pick-up in service sector activity. As a result, markets are now pricing in nearly 50 basis points of Fed rate cuts this year, with the first expected in September.

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Meanwhile, the ECB meeting remained the highlight of the day, with the euro gaining 0.11% to $1.0882. While a rate cut at this meeting has been widely expected, the recent strengthening of the euro against the dollar reflects reduced expectations of significant further rate cuts this year.

Markets are currently pricing in around 63 basis points of ECB rate cuts for the year, implying a 25 basis point cut at Thursday’s meeting, with possibly one or two more such cuts by year-end.

Looking ahead, the focus was not just on the ECB’s decision but also on their communication strategy. Should they unexpectedly hold rates, the euro could experience a brief upheaval. However, given that a cut is almost guaranteed and fully priced in, attention will be on the ECB’s forward guidance.

Elsewhere, the yen remained steady at 156.15 per dollar as investors digested remarks from Bank of Japan Governor Kazuo Ueda, who suggested reducing the central bank’s bond buying as it moves towards an exit from massive monetary stimulus.

The Japanese currency had a brief rally earlier in the week due to unwinding of positions in yen-funded carry trades, particularly following Mexico’s election results. This resulted in a squeeze on long peso/short yen positions, which has been a favorite among carry trades.

Overall, the day saw the euro firming ahead of the ECB decision, while the yen remained steady, supported by potential shifts in BOJ policy.

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