Authors: Karen Brettell and Alun John
NEW YORK/LONDON (Reuters) – The euro fell sharply on Monday after far-right gains in Sunday’s European Parliament elections prompted French President Emmanuel Macron to call early national elections.
Uncertainty in France adds to what will be a busy week for markets as U.S. inflation data will be released on Wednesday, the same day as the Federal Reserve meeting and the Bank of Japan’s week-end meeting.
The euro fell 0.5% against the dollar to $1.0747, its lowest level since May 9. The pound sterling also fell 0.55% to a nearly two-year low of 84.43p, while the latest decline against the Swiss franc was 0.5% to a seven-week low of 0.9632 francs.
The augment in support for right-wing parties “was broadly as expected, but the surprise is that Macron responded by calling early elections, which made the market more nervous,” said Lee Hardman, senior currency analyst at MUFG.
The U.S. dollar also gained after Friday’s jobs report showed employers added more jobs than expected in May, while wages also rose more than expected, prompting investors to temper expectations that the U.S. central bank would cut interest rates already in September.
“The market appears to have entered a vicious cycle,” said Paula Comings, director of foreign exchange sales at US Bank in New York.
The next major data point influencing Fed expectations will be Wednesday’s Consumer Price Index (CPI) for May.
If inflation starts to come down, “the market will get some relief. “I think the dollar may weaken, but probably not beyond its recent range,” Comings said.
However, if it is high, “the euro/dollar will continue to fall towards the lower end of the range,” which “will disproportionately impact (emerging market) currencies,” Comings said.
Fed officials have said they want inflation to fall back toward its 2% annual target before cutting interest rates.
Economists polled by Reuters expect headline consumer price inflation to fall to 0.1% from 0.3% last month, with underlying price pressures holding steady at 0.3% this month.
A New York Fed survey on Monday showed the US public’s outlook on the future path of inflation was mixed in May, although inflation next year is estimated at 3.2% compared with April expectations of 3.3%. .
Fed policymakers will update their economic and interest rate projections after the end of their two-day meeting on Wednesday.
The last such release in March saw the median predicting three rate cuts of 25 basis points this year, and investors expect the modern forecast to show an expectation of fewer rate cuts.
It recently rose 0.13% to 105.23, the highest since May 14.
The fading expectations for interest rate cuts will support the dollar through much of 2024, with the Japanese yen being the worst performer due to the wide interest rate differential between the US and Japan.
The dollar was last up 0.15% against the Japanese currency at 156.91 yen, after rising 0.7% on Friday after the payroll release.
The Bank of Japan will hold a two-day monetary policy meeting on Thursday and Friday. The central bank is widely expected to keep short-term interest rates in the 0-0.1% range.
Last week, Reuters reported that BOJ policymakers are brainstorming how to tardy bond purchases and may present modern guidelines.
In cryptocurrencies, bitcoin gained 1.25% to $70,141.59.
