The USD is tracking a little lower overall in the session so far. Like previous sessions, however, the core majors are more or less flat on the day, with relatively bigger moves coming from the MXN and ZAR, which are rebounding from recent election wobbles. The focus for the session ahead will be the ECB policy decision. A cut is expected and fully priced in. What is less certain is how President Lagarde will frame the outlook.

The case for quick follow-up cuts has weakened due to sticky service inflation and firm wages. As such, a meeting-by-meeting or data-driven approach seems likely to maintain flexibility. Markets have virtually nothing priced in for July at this point, and swaps rather anticipate the next cut to come in September or October.

USD/CAD- The CAD is flat on the day. While the cut was not our base case, it was not too much of a surprise given that 20bps of easing was priced in. The messaging stressed a meeting-by-meeting approach to policy decisions from here, but the overall content of the policy statement and press conference leaned a bit more dovish than expected. The comments gave the impression—rightly or wrongly—that there was a little more urgency to ease policy now. Market repricing of Fed easing risks may help to keep this differential from moving much higher in the weeks ahead, but the wide yield gap is a major impediment for the CAD. The 2Y cash bond spreads are the widest they have been since 2006.

EUR/USD- The ECB delivered as expected and trimmed the three main rates by 25 basis points (bps) each, with the interest rate on the main refinancing operations, the interest rates on the marginal lending facility, and the deposit facility coming down to 4.25%, 4.5%, and 3.75%, respectively. The accompanying statement was mainly hawkish, as policymakers announced they would prefer to keep policy rates sufficiently restrictive for as long as necessary and that they would continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of the restriction. The announcement had a limited impact on EUR/USD, which ticked marginally higher. The pair further advanced with the release of US Weekly Unemployment Claims, which rose more than anticipated in the week ended May 31 to 229K vs. the expected 220K. EUR/USD, however, was unable to conquer the 1.0900 threshold.

GBP/USD- The Pound Sterling trades close to a two-month high against the US Dollar (USD) in Thursday’s New York session. The GBP/USD pair holds strength as the US Dollar weakens due to growing speculation that the Fed will start reducing interest rates from September. According to the CME FedWatch tool, 30-day Fed Funds futures pricing data suggests a roughly 68% chance of interest rates declining from their current levels in September, higher than the 50% recorded a week ago. Investors are also pricing in two rate cuts by the Fed this year.