Investing.com – The U.S. dollar weakened early in the European session on Thursday as delicate economic data fueled expectations of a Federal Reserve rate cut and sterling edged higher on the U.K. election.
At 04:20 ET (08:20 GMT), the dollar index, which tracks the U.S. currency against a basket of six other currencies, was down 0.2% to 104,900, extending edged declines overnight.
Economic weakness hits dollar
The dollar fell slightly on Thursday, extending Wednesday’s weakness after data showed weaker-than-expected payrolls and a delicate reading on non-manufacturing activity.
The data raised expectations that the U.S. economic slowdown will prompt Federal Reserve officials to approve interest rate cuts in the near future.
The tool showed that investors were pricing in a nearly 66% chance of an interest rate cut in September, up from 59% a day earlier.
“We suspect that the reluctance to price in further monetary easing is related to Donald Trump’s rising chances of winning the US presidential election in November. The assumption is that Trump’s protectionist policies and tax cuts could slow down the Fed’s monetary easing,” ING analysts said in a note.
Trading will likely be range-bound on Thursday given the US Independence Day celebrations, with attention turning to Friday’s report for further clues.
Political uncertainty in France
rose 0.1% to 1.0794, with the euro benefiting from dollar weakness, although the common currency may struggle to maintain gains amid regional political uncertainty.
Slovenian central bank President Bostjan Vasle said on Wednesday there should be no rush to cut interest rates, as a number of risks could still undermine the disinflation process in the eurozone.
“The message that European Central Bank officials sent from [a ECB forum in] Sintra has been patient. There is no clear pressure to implement further rate cuts given slower disinflation, and a wait-and-see approach also appears to be preferred over verbal intervention when it comes to the recent bond market turmoil,” ING said.
The euro has lost more than 1% since French President Emmanuel Macron announced a surprise snap election on June 9. It is unlikely to rise much further given the uncertainty surrounding Sunday’s by-election.
“We still doubt markets will be happy with EUR/USD trading near 1.09, given the ongoing uncertainty surrounding French politics and the rising risk of a Trump re-election,” ING added.
rose 0.2% to 1.2759, with the UK holding a general election on Thursday.
The opposition Labour Party is widely expected to end the Conservative Party’s 14-year rule, with the latest polls showing Labour with a lead of around 20 points.
“We have struggled to identify the main risks to the pound ahead of today’s vote, not only because opinion polls strongly suggest that Labour should secure a majority, but also because a change of government seems unlikely to affect the Bank of England’s policy path,” ING said.
Britain’s tight financial situation means any fresh government will have little room to enhance public spending.
Jen on emergency observation
In Asia, it fell 0.3% to 161.21 after nearly topping 162 on Wednesday.
The pair continued to trade well above 160, a level that last attracted government intervention in May. As Japanese officials reiterated their commitment to defending the yen, traders remained alert for any potential intervention in the coming days.
Traders had speculated that the government would take advantage of low trading volumes during the U.S. market holiday on July 4 to intervene. The government’s intervention in May came during the Japanese market holiday.
The index held steady at 7.2701, remaining close to seven-month highs on weakening confidence in the Chinese economy.
