Stefano Rebaudo

(Reuters) – The dollar struggled to choose a direction on Wednesday while the euro remained near recent lows on concerns that a up-to-date government in France could weaken fiscal discipline by increasing the debt risk premium across the euro zone.

Meanwhile, sterling rose after data showed inflation in the UK’s services sector was stronger than expected.

U.S. markets are closed on Wednesday, which will likely result in subdued trading throughout the day.

The dollar fell overnight as U.S. retail sales suggested economic activity remains frail and the Federal Reserve will cut interest rates early.

The euro was last 0.1% higher at $1.0753; hit a 1.5-month low of $1.07 on Friday.

The yield gap between French and German government debt, now seen as an indicator of the risk of a budget crisis in the heart of Europe, fell slightly since Monday but remained near its seven-year highs reached last week.

Analysts pointed out that the common currency was far from pricing in any stern threat to the financial stability of the eurozone bloc.

“The very limited movement in the forex market in contrast to the change in the OAT (French government bond yield) spread highlights the fact that the response is more of a reassessment of fixed income risks,” said Derek Halpenny, head of global markets research at MUFG.

The president of the National Rally (NR), Marine Le Pen, has stated that she is seeking to share an apartment with President Emmanuel Macron and will respect institutions, raising expectations that the NR may withdraw from fiscally costly commitments if it wins the elections. beginning of July.

The European Central Bank could also buy French bonds to avoid an “unjustified and disorderly” widening of yield spreads. Still, ECB chief economist Philip Lane said the recent market turmoil was “not disruptive in nature.”

The European Commission on Wednesday proposed widely anticipated disciplinary action against France, Italy and five other European Union countries over excessive budget deficits.

The rate remained flat at 105.27.

According to CME’s FedWatch tool, markets are currently pricing in the likelihood that the Fed will begin easing rates in September at about 65%, with cuts of almost 50 basis points expected this year.

Sterling rose 0.10% against the euro to 84.41 pence per euro and 0.20% against the dollar to $1.2732 after British data showed underlying price pressures remain powerful.

“What matters now is how much resources the Monetary Policy Committee attributes to current – ​​and possibly retrospective – data,” said Sanjay Raja, chief UK economist at Deutsche Bank Research, recalling that the survey data was “more encouraging.”

Markets are pricing the likelihood of a Bank of England rate cut of around 25% in August, down from 50% before the data, and a 44 basis point easing of monetary policy in 2024, down from almost half a percentage point before the data.

The BoE holds a policy meeting on Thursday.

The Swiss franc hit a seven-month high against the euro at 0.9475 and was last down 0.1% at 0.9503.

The common currency has been steadily weakening against the Swiss currency since slow May, when it reached 0.9930 per franc, the highest since April 2023.

“Some observers see this as a renewed threat of intervention or as a hidden statement that (Swiss National Bank President Thomas) Jordan is offering to all market participants who hold long positions in the Swiss franc, especially against the euro,” said Ulrich Leuchtmann, head of forex strategy at Commerzbank (ETR :), recalling Jordan’s speech at the end of May.

Jordan argued that inflation risks would likely be related to a weaker Swiss franc, which the SNB “could counteract by selling foreign currencies.”

BofA expects the SNB to make a second interest rate cut of 25 basis points next week and express its willingness to “be active in the foreign exchange market if necessary.”

The Australian dollar rose 0.04% to 0.667 against the US currency, helped by a hawkish statement from the Governor of the Reserve Bank of Australia, Michele Bullock, following Tuesday’s central bank decision on interest rates.

The yen was little changed at 157.93 per dollar as it continues to come under pressure from wide interest rate differentials, particularly between Japan and the US.

Analysts say a tightening of the Bank of Japan’s monetary policy is on the horizon, but the BOJ will prefer a tardy approach.