By Tom Westbrook and Amanda Cooper
SINGAPORE/LONDON (Reuters) – The Japanese yen hit a six-week high before retreating against the dollar on Thursday, keeping traders on alert for signs of official buying, while the euro steadied ahead of a European Central Bank meeting.
The single European currency held near four-month highs ahead of a European Central Bank decision that is almost certain to lead to no change in monetary policy, leaving traders to focus on the prospect of an interest rate cut in September.
“We expect the ECB to confirm that future rate cuts will be dependent on further declines in inflation and wage growth,” said Joe Capurso of the Commonwealth Bank of Australia.
“The risk is that the September discount prices will fall.”
The euro was steady at $1.09325. Markets are now signaling that traders believe eurozone interest rates will be cut at least once more this year, with a reasonable chance of another cut beyond that.
Meanwhile, the pound traded near a one-year high, falling below $1.30 after UK data showed wage growth slowed compared to expectations in May, keeping the chance of an interest rate cut in August well below 50%.
Sterling was flat at $1.29895, but is on track to rise 2.1% so far this year, making it the best performing major currency against the dollar, largely due to interest rate expectations.
“Markets are pricing in a BoE rate cut in August as less likely, while the chances of a Fed rate cut in September have risen,” said Andrew Goodwin, chief UK economist at Oxford Economics.
“I suspect that the recent surge in sterling will prove to be just short-term noise, and that we will soon settle into a pattern where both the Bank of England and the Fed are easing monetary policy at a similar pace. So this is likely to lead to sterling stabilising around its current level,” he said.
yen rise
The yen rose about 0.53% overnight, as the dollar extended a prolonged slide that put it on track for its biggest two-week decline against the Japanese currency this year, down 2.8% in the period.
The dollar was up 0.15% at 156.445 in the latest trading, but is still about five yen below its level more than a week ago.
The Bank of Japan’s money market data suggests authorities may have bought nearly 6 trillion yen ($38 billion) last week, and traders said the moves this week bore the hallmarks of more intervention, or at least markets that could easily be spooked by the prospect.
“Many Japanese traders and investors were looking to reload their positions after the intervention,” said Rodrigo Catril, a strategist at National Australia Bank in Sydney.
“A big move (on Wednesday) would have put them in an offside position and made them reassess a little bit if not get rid of those positions.”
Net short selling of the yen hit a 17-year high last week.
Interest rates markets are pricing in more than 60 basis points of U.S. rate cuts this year and about 20 basis points of rate hikes in Japan, narrowing a wide gap in rates that has encouraged investors to take large short positions in the yen.
Katril and other analysts pointed to comments from U.S. presidential candidate Donald Trump — who described the strength of the dollar and the weakness of the yen and yuan as a big problem in an interview with Bloomberg Businessweek — as rattling markets.
So far this year, the yen has been the worst performer among G10 currencies against the dollar, losing more than 9%, while the yuan has fallen about 2.2%.
The Australian dollar received a small boost from some mixed jobs data and rose 0.1% to $0.6732, while the New Zealand dollar fell 0.15% to $0.6073.
(1 dollar = 156.3600 yen)
