Peso recovers on Fed, ECB rate cut hopes

The peso rebounded against the dollar on Thursday as data supported hopes of a US Federal Reserve rate cut by this year and with the European Central Bank (ECB) poised to begin easing its own policy stance for the first time since 2019.

The local unit closed at PHP 58.611 per dollar on Thursday, strengthening by 16.9 centavos from its P58.78 finish on Wednesday, Bankers Association of the Philippines data showed.

The peso opened Thursday’s session stronger at PHP 58.68 against the dollar. Its weakest showing was at PHP 58.72, while its intraday best was at PHP 58.54 versus the greenback.

Dollars exchanged went up to USD 1.38 billion on Thursday from USD 1.32 billion on Wednesday.

The peso was supported by heightened expectations of a rate cut by the Fed within the year, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message.

The May private payrolls report on Wednesday was the latest data to suggest an easing in labor market tightness that could propel the Fed to begin cutting rates this year, Reuters reported. A report on Tuesday showed job openings fell in April to the fewest in more than three years.

Traders now see a nearly 69% chance of a September rate reduction, according to the CME’s FedWatch tool. Expectations had hovered around 50% last week.

“The peso appreciated due to optimistic expectations ahead of a potential European Central Bank policy rate cut,” a trader added in a text message.

The European Central Bank was all but certain to cut interest rates from record highs on Thursday and acknowledge it has made progress in its battle against high inflation, while also stressing the fight is not yet over given sticky services prices, Reuters reported.

ECB policy makers have clearly telegraphed their intention to lower borrowing costs after seeing inflation in the 20 countries that share the euro fall from more than 10% in late 2022 to just above their 2% target in recent months.

The broad-based decline was seen as more than enough for the ECB to begin undoing the steepest streak of interest rate hikes in its history, which were a response to spiraling prices in the wake of Russia’s invasion of Ukraine.

For Friday, the trader said the peso could depreciate again ahead of likely robust US employment data.

The trader expects the peso to move between PHP 58.50 and PHP 58.75 on Friday, while Mr. Ricafort sees it ranging from PHP 58.50 to PHP 58.70 per dollar. — AMCS with Reuters