The US dollar fell in early European trading on Thursday as weak economic data raised expectations of an interest rate cut by the Federal Reserve, while sterling rose as the UK headed to the polls.
At 04:20 ET (08:20 GMT), the dollar index, which tracks the greenback against a basket of six other currencies, was down 0.2% at 104.900, extending sharp declines seen overnight.
Economic weakness affects the dollar
The dollar fell slightly on Thursday, extending Wednesday’s weakness after data showed weaker-than-expected employment figures and a weak reading on non-manufacturing activity.
The data reinforced expectations that a slowing US economy will persuade Federal Reserve officials to agree to cut interest rates in the near future.
The tool showed that traders expect a 66% chance of a rate cut in September, up from 59% a day earlier.
“We suspect that some of this hesitation to price in further easing is related to the higher chances of Donald Trump winning the US presidency in November. The assumption here is that Trump’s protectionist policies and tax cuts could slow the pace of Fed easing,” analysts at ING said in a note.
Trading is likely to be range-bound on Thursday, given the US Independence Day celebrations, and much attention will shift to Friday’s report for further guidance.
Political uncertainty in France
The euro rose 0.1% to 1.0794, with the euro benefiting from a weaker dollar, although the single currency may struggle to hold onto gains amid regional political uncertainty.
Slovenia’s central bank should not rush to cut interest rates again, as there are still a range of risks that could derail the euro zone’s inflation-cutting process, Slovenia’s central bank governor Bostjan Vasli said on Wednesday.
“The message from ECB officials from the ECB forum in Sintra was one of patience. There is clearly no pressure to move with successive rate cuts in the face of slowing inflation, and the preference also seems to be for a wait-and-see approach rather than verbal intervention when it comes to the recent turmoil in the bond market,” ING said.
The euro has fallen more than 1% since French President Emmanuel Macron called a snap election on June 9, and it is difficult to see it making significant gains given the uncertainty ahead of Sunday’s run-off vote.
“We remain a bit skeptical that markets will take comfort in EUR/USD trading near 1.09 given the ongoing uncertainty over French politics and the growing risk of Trump being re-elected,” ING added.
The pound rose 0.2% against the US dollar to 1.2759, as the United Kingdom heads to the polls on Thursday in a general election.
The opposition Labour Party is widely expected to end 14 years of Conservative rule, with the latest opinion polls showing Labour leading by around 20 points.
“We have struggled to identify the main risks to sterling ahead of today’s vote. Not only is the opinion polls strongly suggesting that Labour will secure a majority, but also because a change in government seems unlikely to affect the Bank of England’s policy path,” the Bank of England said in a report.
The UK’s difficult financial situation means that any new government will have little scope to increase public spending.
Yen waiting for intervention
In Asia, the index fell 0.3% to 161.21, after nearly crossing the 162 level on Wednesday.
The pair was still trading above the 160 level – the level that last attracted government intervention in May. With Japanese officials reiterating their commitment to defending the yen, traders remained on alert for any possible intervention in the coming days.
Traders expected the government to take advantage of low trading volumes during the July Fourth holiday in the United States to intervene. The government intervention in May occurred during the Japanese market holiday.
GBP/USD held steady at 7.2701, remaining close to a seven-month high amid declining confidence in the Chinese economy.