Alan John and Ankur Banerjee
LONDON/SINGAPORE (Reuters) – The euro fell sharply on Monday amid political uncertainty after far-right gains in the European Parliament vote on Sunday prompted embattled French President Emmanuel Macron to call early national elections.
Uncertainty in France adds another element to what will be a busy week for markets, with key US inflation data due on Wednesday, the same day as the Federal Reserve meeting followed by the Bank of Japan meeting.
The euro fell 0.6% against the dollar to $1.0733, its weakest since May 9. It also fell 0.4% against sterling to a near two-year low of 84.53 pence and was last down 0.6% against the Swiss franc on seven-week trading. minimum 0.9626 francs.
“The EU election results over the weekend generally showed increased support for right-wing parties, broadly what was expected, but the element of surprise is that Macron reacted by calling early elections, which makes the market even more nervous. ” said Lee Hardman, senior currency analyst at MUFG.
“This has added to the euro sell-off we saw late last week, and another factor beyond that is that the US jobs report was very strong, which increases the risk of a hawkish policy signal from the Fed when they meet Wednesday. ”
The Federal Reserve will wrap up its two-day policy meeting on Wednesday. Data on Friday showed nonfarm payrolls increased by 272,000 last month, well above Reuters poll expectations of 185,000.
Markets are now pricing the Fed’s rate cut this year at 36 basis points (bps), down from nearly 50 bps. (i.e. two cuts of 25 bps) before the release of employment data.
US consumer inflation data will become another factor influencing the Fed’s decision-making. While no policy changes are expected at the meeting, the Fed will release its latest batch of “dot plots” of policymakers’ forecasts for the path of interest rates.
In the last such release in March, the average forecast called for three rate cuts of 25 bps. this year. Investors will be watching to see how much this is revised downward.
Declining rate cut expectations supported the dollar through much of 2024, with the Japanese yen particularly affected.
The dollar was last up 0.1% against the Japanese currency at 156.85 yen, having risen 0.7% on Friday after employment data. With the pound falling 0.14% to $1.2705, the index, which tracks the currency against six major peers, rose 0.22% to 105.29, a one-month high.
Japan will also be in focus this week as the Bank of Japan is due to hold a two-day monetary policy meeting on Thursday and Friday, with the central bank expected to keep short-term interest rates in the range of 0-0.1%. .
Reuters reported last week that Bank of Japan policymakers were mulling ways to slow bond purchases and could propose new recommendations.
Speculation is growing in the market that the Bank of Japan may adjust its bond-buying mechanisms, and if the central bank fails to meet those rates, the yen could come under further pressure.
“Without any hawkish surprise, JPY could be sold initially following the policy announcement, similar to what we have seen following past meetings,” Nomura analysts said.
“Moreover, in the event of dovish surprises, for example, if the Bank of Japan avoids reducing its purchases of Japanese government bonds or only slightly reduces its purchases (of Japanese government bonds), there is a risk that it could again slip into the zone of possible intervention, as we saw in April.”
Japanese officials spent about 9.8 trillion yen on foreign exchange interventions to support the currency in April and May.
($1 = 156.9 yen)