Ray V and Stefano Rebaudo
(Reuters) – The dollar steadied on Wednesday as weak U.S. economic data put upward pressure on U.S. rate cuts, but political unrest in Europe provided some support, weakening the euro.
Meanwhile, sterling rose after data showed UK services inflation was stronger than expected.
U.S. retail sales barely rose in May and the previous month’s figures were revised lower, data showed on Tuesday, indicating that economic activity remained sluggish in the second quarter.
That pushed the U.S. currency lower, although it later regained some ground against a basket of currencies as the euro, which has the largest weight in the eurozone, remains under pressure from political turmoil in France and the wider bloc.
The euro was last trading marginally lower at $1.0732, while the dollar index was unchanged at 105.27.
The yield gap between French and German government debt, now seen as an indicator of the risk of a fiscal crisis in the heart of Europe, narrowed slightly since Monday but remained close to the seven-year high reached last week. “We thought US retail sales would be weak, and they were,” said Joseph Capurso, head of international and sustainable economics at Commonwealth Bank of Australia (OTC:).
“The situation is finally getting worse. It seemed like consumer demand in the US was never going to slow down, but that appears to be the case now.”
Markets are currently pricing in a 67% chance that the Fed will begin cutting rates in September, according to CME’s FedWatch tool, with rates expected to cut nearly 50 basis points this year.
Following the data, sterling rose 0.20% against the euro to 84.34 pence per euro and 0.15% against the dollar at $1.2725.
UK inflation returned to its 2% target in May for the first time in almost three years, data showed on Wednesday, but underlying price pressures remained strong.
“We think this service inflation reading will raise the bar for a rate cut in August,” said Sanjay Raja, chief UK economist at Deutsche Bank Research.
“What’s important now is the weight the Monetary Policy Committee places on immediate – and perhaps retrospective – data,” he said, noting that the survey data was “more encouraging.”
Markets have priced the likelihood of a Bank of England rate cut in August at around 30%, up from 50% before the data, and at 44 basis points of monetary easing in 2024, up from almost half a percentage point before the data.
The Bank of England will hold its policy meeting on Thursday.
The Swiss franc hit a new seven-month high against the euro at 0.9475, up 0.14%.
The euro has weakened steadily against the Swiss currency since late May, when it hit 0.9930 per franc, its highest level since April 2023.
“Some observers see this as a new threat of intervention or as an implicit position that (Swiss National Bank Chairman Thomas) Jordan is offering to all market participants who are long Swiss francs, especially against the euro,” said Ulrich Leuchtmann, head of the department. currency strategy. at Commerzbank (ETR:), recalling Jordan’s performance at the end of May.
Jordan argued that inflation risks would likely come from a weakening Swiss franc, which the SNB “could counter by selling foreign currency.”
The Australian dollar has outperformed the US currency, helped by Reserve Bank of Australia Governor Michelle Bullock’s aggressive message following the central bank’s interest rate decision on Tuesday.
The price was last seen up 0.12% at $0.6664, extending gains of 0.66% from the previous session. Meanwhile, the New Zealand dollar fell 0.19% to $0.6133.
Elsewhere, the yen was little changed at 157.83 to the dollar as it continued to be pressured by sharp differences in interest rates, particularly between Japan and the United States.
Bank of Japan Governor Kazuo Ueda said on Tuesday the central bank could raise interest rates next month depending on economic data available at the time.
Analysts said further policy normalization was on the horizon, but they expected the Bank of Japan to move slowly.