ECB cut awaited as Wall Street sets new record

ECB set to deliver this week’s second cut 

The European Central Bank is on course to become the second central bank in the G7 this week to lower borrowing costs after the Bank of Canada paved the way on Wednesday. Easing inflation and sluggish economic growth prompted the BoC to cut its overnight rate by 25 basis points to 4.75%. Governor Macklem signalled that it would be “reasonable to expect further cuts” if inflation continues to recede.

The Canadian dollar briefly tumbled to a near two-week low against the greenback in the aftermath but then recovered as rising expectations that the Fed will make its first cut in September undermined the US currency.

The growing hopes of a Fed cut could also support the euro if, as widely expected, the ECB trims its deposit rate by 25bps. Although the decision, due at 12:15 GMT, has been well telegraphed by the bank, recent data have started to cast doubt on the scope for further cuts with both inflation and growth data surprising to the upside.

President Lagarde’s press conference at 12:45 GMT will therefore be a bigger focus for investors today as any signs of hesitancy to cut again soon could add fuel to the euro’s short-term uptrend versus the dollar.

Nvidia shines as Wall Street hits another record 

In equity markets, however, the prospect of a hawkish cut did not scare off traders as shares on Wall Street soared to all-time highs on Wednesday. The US market continues to be led higher by Nvidia and other AI-related stocks.

Nvidia’s impressive run is showing no signs of fading anytime soon, with its market cap surpassing $3 trillion for the first time to overtake Apple as the world’s second-most valuable company.

Both the S&P 500 and Nasdaq ended the day in record territory, leaving the Dow Jones trailing behind, while major indices globally are in the green today.

A September cut back in the picture 

Aside from the ongoing AI frenzy, renewed optimism about Fed rate cuts is also driving the rally. A September cut is now more than 75% priced in, with investors increasingly confident of a follow-up move in December.

The turnaround comes after a slew of not-so-hot data out of the US. Although yesterday’s stronger-than-expected ISM services PMI did raise question marks about whether or not the US economy is indeed slowing, markets seem to have focused more on the miss in the private ADP employment report.

This raises the stakes for Friday when the official nonfarm payrolls numbers are due. Any positive surprises could see this week’s moves being reversed.

Yen rebound falters 

The US dollar is steadier but still headed for a second week of losses as Treasury yields have been pummelled by growing expectations of a possible Fed pivot during the summer.

The Japanese yen had been the main winner earlier in the week when risk aversion spiked, but comments from Bank of Japan officials since, including from Governor Ueda, have cast doubt on the possibility of further rate hikes. The dollar has climbed back above 156 yen, with the Japanese currency finding little support from hints by the BoJ that bond purchases will be scaled back further.