Euro close to three-week low, dollar stable, with rate-cut bets increasing

7 Dec 2023 , 09:42 AM

As traders increased their wagers that the European Central Bank (ECB) will begin reducing rates in March of next year, the euro lingered near a three-week low on Thursday. In contrast, the dollar remained stable ahead of an important payrolls data release later this week.

The euro was up 0.05% at $1.0767, but it was still near the Wednesday lows of $1.07595. With a 1% weekly decrease this week, the single currency is headed for its largest weekly fall since May.

It is estimated by traders that the ECB will decrease interest rates at its meeting in March by around 85% of the time, and that by the end of the year, about 150 basis points of easing will have been priced in.

In an interview released on Wednesday, Francois Villeroy de Galhau, the head of the Bank of France and member of the European Central Bank, hinted that the possibility of a rate cut might come up in 2024.

As Villeroy stated to La Depeche du Midi, ‘disinflation is happening more quickly than we thought.’

Next Thursday is the ECB’s interest rate-setting day. It is almost a given that they will maintain the present record high of 4%. It is also expected that the Bank of England and the Federal Reserve would maintain their respective rate of interest next Wednesday and Thursday.

Following a 3% decline in November, the dollar has stabilised this month as speculators increase their bets on other central banks’ rate cuts.

After rising 0.17% overnight, the dollar index, which compares the value of the US dollar to six competitors, was little changed at 104.12. This week’s 0.9% increase in the index puts it on pace for its best weekly performance since July.

According to data released on Wednesday, private payroll growth in the United States in November was less than anticipated, providing further evidence of the labour market’s slowdown.

Investors hoping for a better understanding of the labour market will be concentrating on Friday’s non-farm payrolls statistics.

Expectations that the U.S. Federal Reserve is nearing the end of its rate-hike cycle and may start lowering rates as early as March have been heightened by a recent run of weakening economic statistics and remarks from Fed members.

According to the CME FedWatch tool, markets are pricing in a 60% possibility of a rate drop in March, up from 50% a week earlier. Next year, they expect 125 basis points of rate reduction from the Fed.

However, analysts have issued a warning, stating that the markets have priced in rate cuts for next year too aggressively.

In contrast to its peers, the Bank of Canada maintained its benchmark overnight rate at 5% on Wednesday and indicated that it was still concerned about inflation while recognising an overall slowdown in the economy and a broad softening of prices.

The Canadian dollar increased in value relative to the US dollar by 0.01% to 1.36.

The value of the Japanese yen increased elsewhere, to 147.07 per dollar, or 0.16%. At $7.1717 per dollar, the offshore Chinese yuan saw a 0.02% decrease. The Australian dollar increased to $0.655 (0.03%).

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