Euro's Rally Fuels ECB Rate Cut Speculation

Euro zone bond yields remained stable amid concerns over the euro's strength potentially prompting the ECB to cut rates. German yields were largely unchanged as the euro surpassed $1.20 before dipping slightly. ECB's Kochert suggested further euro appreciation might necessitate rate cuts, while the Fed kept rates steady.

Euro zone bond yields remained stable on Thursday amidst ongoing concerns about the euro's strength, which could pressure the European Central Bank (ECB) to consider cutting interest rates. In contrast, the U.S. Federal Reserve opted to keep rates unchanged.

Germany's 10-year bond yield saw little movement, settling around 2.86%. The yields on shorter-dated euro zone bonds had retreated on Wednesday, with the German two-year yield reaching a weekly low at 2.07%. Although the euro rose above the $1.20 mark earlier in the week, it has since traded just below that level.

Given the euro zone's status as a net energy importer, even minor gains in the currency can reduce the cost of energy and imports, potentially lowering inflation. ECB official Martin Kochert hinted that continued euro appreciation might necessitate rate cuts. ING analysts noted that the euro's rise slightly increases the likelihood of ECB cuts but anticipated limited immediate effects. Meanwhile, Fed Chair Jerome Powell maintained a cautiously optimistic outlook, with no immediate rate hike in the Fed's baseline plan.

(With inputs from agencies.)