Market Analysis

The euro declined on Monday after French President Emmanuel Macron announced a surprise election, following a defeat by the far-right in the European Union elections. Meanwhile, the dollar remained stable ahead of the Federal Reserve meeting later this week.

Early trading in Asia saw the euro fall to $1.0764, its lowest since May 9. It later settled at $1.0776, down 0.24%, as investors considered the impact of renewed political uncertainty in France, the eurozone's second-largest economy, during a crucial election year.

Eurosceptic nationalists achieved significant gains in the European Parliament elections on Sunday, according to aggregated exit polls. This prompted Macron to take a risky step to regain his authority.

“The prospects of a far-right victory in France's snap elections may keep the euro under pressure in the near term,” noted Mansoor Mohi-Uddin, chief economist at Bank of Singapore. “However, this week’s U.S. inflation data and the FOMC meeting are likely to have a greater influence on the exchange rate.”

Last week, the European Central Bank cut interest rates in a widely anticipated move but provided little guidance on future monetary policy, given that inflation remains above target.

The U.S. Dollar Index, which tracks the greenback against six major rivals, reached 105.09, its highest since May 30. This followed a 0.8% rise on Friday after data revealed that the U.S. economy added significantly more jobs than expected in May.

U.S. nonfarm payrolls increased by 272,000 jobs last month, surpassing economists’ expectations of a 185,000 job increase, according to a Reuters poll.

Ryan Brandham, head of global capital markets for North America at Validus Risk Management, commented that recent U.S. labor market data had suggested some softening, supporting discussions of potential rate cuts in the second half of 2024. “However, this latest result will likely dampen that conversation. The Fed has shown patience, waiting for confidence that inflation will fully return to target before signaling rate cuts, and that caution seems justified.”

The strong jobs data caused traders to adjust their expectations for when and how much the Fed will cut rates. Markets are now pricing in 36 basis points of cuts this year, down from nearly 50 basis points – or at least two cuts – anticipated before the jobs data.

The likelihood of a rate cut in September has dropped to about 50%, from around 70% late last Thursday.

While the Fed is not expected to change its policy at this week's meeting, attention will be on comments from Fed Chair Jerome Powell and any updates to economic projections from policymakers. Additionally, U.S. inflation data is scheduled for release on Wednesday.

“We anticipate that the median dot will fall from three cuts to less than two. A hawkish hold?” speculated Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.

The Bank of Japan will also hold its two-day monetary policy meeting this week, with expectations that it will maintain short-term interest rates in the 0-0.1% range.

According to sources familiar with its plans, the Bank of Japan is considering ways to slow its bond buying and may provide new guidance as early as this week, potentially marking the first step in reducing its nearly $5 trillion balance sheet.

The Japanese yen weakened to 156.95 in early Monday trading. The currency remains close to the 34-year low of over 160 yen per dollar reached at the end of April, which led Japanese officials to intervene in the currency market with approximately 9.8 trillion yen ($62.46 billion) to support it.

Sterling remained stable at $1.2723, after reaching $1.2700, its lowest point in a week earlier in the session.

Paraphrasing text from "Reuters" all rights reserved by the original author.