By Ankur Banerjee
SINGAPORE (Reuters) – The euro fell on Monday as French President Emmanuel Macron called a shock election after being defeated by the far right in the European Union, while the dollar held steady ahead of the Federal Reserve meeting later in the week.
The euro fell to $1.0764, its lowest level since May 9, in early trading in Asia. It was last down 0.24% at $1.0776 as investors weighed the implications of renewed political uncertainty in the euro zone’s second-largest economy in a key election year.
Eurosceptic nationalists made the biggest gains in European Parliament elections in Sunday’s election, a joint exit poll showed, prompting Macron to take a risky gamble in a bid to restore his authority.
“The prospects of a far-right victory in France’s snap elections could keep pressure on the euro in the short term,” said Mansoor Mohi-Uddin, chief economist at the Bank Of Singapore.
“But it is still more likely that the exchange rate will be affected by US inflation data and this week’s FOMC meeting.”
The European Central Bank cut interest rates last week in a well-telegraphed move but gave few hints about the outlook for monetary policy as inflation remains above target.
The dollar index, which measures the U.S. currency against six rivals, stood at 105.09, the highest since May 30, after rising 0.8% on Friday after data showed the world’s largest economy rose much more in May jobs created than expected.
U.S. nonfarm payrolls rose by 272,000 jobs last month, data showed, while economists polled by Reuters had forecast payrolls would rise by 185,000.
Ryan Brandham, head of global capital markets for North America at Validus Risk Management, said U.S. labor market data has recently shown some signs of weakening, supporting discussions about rate cuts in the second half of 2024.
“But this outcome will likely take the steam out of that conversation. The Fed has shown patience in waiting for confidence that inflation will fully return to target before announcing rate cuts, and that caution appears justified.”
The employment data prompted traders to again shift their expectations on when the Fed will cut rates and by how much. Markets are now pricing in a 36 basis point cut this year, compared with almost 50 basis points – or at least two cuts – before the jobs data.
The chance of a rate cut in September is now about 50%, down from about 70% late on Thursday.
The Fed is not expected to make any changes at its policy meeting this week, but the focus will be on comments from Fed Chair Jerome Powell and changes in policymakers’ economic projections. American inflation figures will also be released on Wednesday.
“We suspect the median will fall from three cuts to less than two. An aggressive stance?,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.
The Bank of Japan will hold its two-day monetary policy meeting this week, with the central bank widely expected to keep short-term interest rates in a range of 0-0.1%.
Policymakers are brainstorming ways to slow bond buying and could offer new guidance as early as this week, sources familiar with the policy told Reuters, in what would be a first step toward trimming the stock’s balance sheet. almost $5 trillion.
The Japanese yen weakened to 156.95 in early trading on Monday. The currency remains close to a 34-year low above 160 per dollar reached in late April, prompting Japanese officials to spend about 9.8 trillion yen ($62.46 billion) on currency market interventions to support it .
Sterling was flat at $1.2723 after hitting $1.2700, its lowest level a week earlier in the session.
($1 = 156.9000 yen)
(Reporting by Ankur Banerjee in Singapore; Editing by Shri Navaratnam)
