SYDNEY: Dollar bulls were ready to pounce on the euro on Thursday should the European Central Bank sound dovish on rates later in the day, given the Federal Reserve had pressed the pause button on its easing cycle overnight.
Markets are more than fully priced for the ECB to trim rates by 25 basis points to 2.75% later on Thursday, with even a small chance of 50 basis points given how weak the EU economy is.
“The euro area’s inflationary pulse is evaporating, and the risk of a sustained inflation undershoot is material,” warned analysts at ANZ.
“The complex economic and political challenges facing the euro area’s largest economies increases the onus on the ECB to support growth.”
This is one reason markets are priced for further 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, it could pile fresh pressure on the euro.
The single currency was trading flat at $1.0425 , having found support around $1.0380 overnight.
The dollar was down a fraction both against the yen at 155.01 and on a basket of currencies at 107.880 .
It had briefly popped higher overnight when the Fed kept rates steady as expected but 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, Treasury yields rose at first but soon rallied back to flat with the 10-year at 4.534% . Fed fund futures pared losses to imply around 47 basis points of easing this year, compared to 49 basis points a day earlier.
The probability of another rate cut by June was little changed at 73%.
Data on U.S. advance GDP due later Thursday are expected to show a modest pullback in growth to an annualised 2.6% in the fourth quarter, though forecasts ranged widely from 1.7% to 3.2% suggesting the 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 U.S. tariff policy.
Howard Lutnick, President Donald Trump’s nominee to run the Commerce Department, said on Wednesday that Canada and Mexico could avoid looming U.S. 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% overnight and flagged more to come.
The attraction of such high yields has seen the real rally around 5% since the start of the new year.
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