Karen Brettel and Alan John
NEW YORK/LONDON (Reuters) – The euro fell sharply on Monday after French President Emmanuel Macron called for early general elections following gains for far-right parties in Sunday’s European Parliament elections.
It’s set to be a busy week for markets with US inflation data due to be released on Wednesday, the Federal Reserve’s policy meeting on the same day and the Bank of Japan meeting to close the week, plus uncertainty in France.
The euro fell 0.5% against the dollar to $1.0747, its lowest since May 9. It also fell 0.55% against the pound to a two-year low of 84.43 pence, and 0.5% against the Swiss franc to a seven-week low of 0.9632 francs.
Lee Hardman, senior currency analyst at MUFG, said the increase in support for right-wing parties was “broadly expected, but President Macron’s decision to call early elections was a surprise and has made markets more nervous.”
The U.S. dollar also rose after Friday’s jobs report showed employers added more jobs than expected in May and wages rose more than expected, leading traders to back away from expectations that the U.S. central bank will cut interest rates as early as September.
“The market was clearly caught off guard,” said Paula Cummings, head of foreign exchange sales at U.S. Bank in New York.
The Consumer Price Index (CPI) for May, due on Wednesday, will be the next major data point that will determine Fed expectations.
Weakening inflation “would provide some relief to markets,” Cummings said. The dollar could weaken, but it’s unlikely to break out of its recent range.
But at higher levels, “the euro/dollar will continue to fall towards the lower end of its range,” Cummings said, “which will have a disproportionate impact on (emerging market) currencies.”
Fed officials have said they want to see inflation approach their 2 percent annual target for several months before cutting interest rates.
Economists surveyed by Reuters expect headline consumer price inflation to ease to 0.1 percent from 0.3 percent last month, while core price pressures will be stable at 0.3 percent month-on-month.
Americans’ outlook for the future direction of inflation was mixed in May, according to a New York Fed survey conducted on Monday, but most see the inflation rate at 3.2% a year from now, down from the 3.3% forecast in April.
Fed policymakers are due to update their economic and interest rate outlooks when they conclude their two-day meeting on Wednesday.
The previous forecast, released in March, predicted three rate cuts of 25 basis points each this year, but investors are expecting the new forecast to signal a forecast for fewer cuts.
The dollar index rose 0.13% to 105.23, its highest level since May 14.
Diminishing expectations of rate cuts have supported the dollar for much of 2024, but the Japanese yen has performed the worst due to the wide interest rate differential between the United States and Japan.
The dollar rose 0.7% last week on Friday after the jobs data was released and was up 0.15% against the yen to 156.91 yen.
The Bank of Japan holds a two-day monetary policy meeting on Thursday and Friday and is widely expected to keep short-term interest rates in a range of 0-0.1%.
Reuters reported last week that Bank of Japan policymakers are considering ways to slow the pace of bond purchases and may issue new guidance.
In cryptocurrencies, Bitcoin rose 1.25% to $70,141.59.
(Reporting by Karen Brettle and Alan John; Editing by Mark Potter and William MacLean)
