Yen firms on euro, dollar as rate outlooks diverge
The yen made broad gains on Thursday as Japan looks on track to keep raising interest rates as others cut, with the European Central Bank seen certain to deliver just the latest in a string of easings today.
The yen was almost the sole mover in Asia, as the dollar eased 0.5% to 154.43 and the euro a similar amount to 160.96 yen.
The single currency was otherwise trading flat on the dollar at $1.0423, having tested support around $1.0380 overnight when the Federal Reserve paused it easing cycle.
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 at her media conference later Thursday, it could pile fresh pressure on the euro.
In contrast, Bank of Japan Deputy Governor Ryozo Himino is expected to underline the outlook for more tightening there in a speech later on Thursday.
PARSING POWELL
The dollar had 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, where the probability of a cut is put at 73%. <0@USDIRPR>
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 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 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.
