By Amanda Cooper
LONDON (Reuters) – The dollar held steady on Monday as investors warmed to the thought that U.S. inflation may have slowed enough for the Federal Reserve to cut interest rates in 2024, while the euro was tranquil ahead of an expected cut from the European Central Bank this week.
Among emerging market currencies, the Indian rupee and Mexican peso strengthened following exit poll results from the general elections in both countries. [EMRG/FRX]
The Indian rupee, the best-performing Asian currency this year, fell last to 83.035 per dollar as exit polls pointed to a significant mandate and a scarce third term for Prime Minister Narendra Modi.
The Mexican peso weakened on Monday after the ruling party declared Claudia Sheinbaum the winner of the presidential election “by a wide margin” after polls closed on Sunday.
“It’s a mega week for financial markets,” said Kathleen Brooks, research director at trading platform XTB, citing the ECB’s interest rate decision and the Mexican elections as factors.
The dollar posted its first monthly decline this year in May, weighed down by shifting expectations about when the US central bank will cut interest rates and by how much, with markets pricing in a 37 basis point cut from the Fed this year.
Friday’s data showed a measure of consumer inflation rose slightly in April and price pressure remained above the central bank’s 2% target.
Traders are pricing in about a 60% chance of a September rate cut, down from 49% before the report.
“If the Fed can cut because it can, not because it has to stave off a recession, markets should be able to cope,” said Brian Jacobsen, chief economist at Annex Wealth Management.
“The market will grow impatient with the Fed’s patience as growth data suggests the Fed is waiting too long to recalibrate interest rates.”
The index, which measures the U.S. currency against six others, rose 0.1% to 104.67. The index fell by 1.56% in May, but increased by 3% for the year.
This week, investors’ attention will be focused on the ISM manufacturing survey later in the day, as well as Friday’s employment data, which will lend a hand assess the strength of the US labor market.
“If the unemployment rate does rise, it could be a sign that the U.S. labor market is not as tight as some think, which could lead to further recalibration of interest rate expectations and even some weakening in the dollar as the weekend approaches.
Sterling fell 0.2% to $1.27215 while the euro fell slightly to $1.0844 ahead of Thursday’s ECB monetary policy meeting, when the central bank is almost certain to cut interest rates.
The comments from ECB officials will be the focus of traders’ attention alongside economic projections as they assess whether the central bank will make further cuts after Thursday in the wake of data showing euro zone inflation rising in May.
Markets are pricing in this year’s interest rate cuts by the ECB by 57 basis points.
S&P downgraded France’s credit rating by one notch to ‘AA-‘ on Friday, citing expectations that a higher-than-expected deficit will boost debt in the euro zone’s second-largest economy.
Meanwhile, data released on Friday showed that Japan’s monetary authorities spent 9.79 trillion yen ($62.23 billion) on currency market interventions over the past month to support the yen.
The yen is by far the worst performing major currency against the dollar this year, with a 10% depreciation.
The yen was little changed against the dollar on Monday at 157.18, facing last week’s low of 157.715.
