Written by Amanda Cooper
LONDON (Reuters) – The dollar stabilized on Monday, as investors accepted the idea that US inflation may have slowed enough to prompt the Federal Reserve to cut interest rates in 2024, while the euro remained calm ahead of an expected cut from the European Central Bank. . this week.
Among emerging market currencies, the Indian rupee and Mexican peso strengthened following the results of post-general election polls in both countries. (EMRG/FRX)
The Indian rupee, the best-performing Asian currency this year, was last at 83,035 to the dollar, as opinion polls pointed to a major mandate and a rare third term for Prime Minister Narendra Modi.
The Mexican peso fell on Monday after the ruling party declared Claudia Sheinbaum the winner of the presidential election by a “large margin” after polls closed on Sunday.
“This is a huge week for financial markets,” said Kathleen Brooks, research director at trading platform XTB, citing the European Central Bank's interest rate decision and the Mexican election as factors.
The dollar posted its first monthly decline of the year in May, weighed down by changing expectations about when the US central bank will cut interest rates and by how much, with markets pricing in 37 basis points of cuts this year from the Federal Reserve.
A measure of consumer price inflation saw a modest rise in April and price pressures remained above the central bank's 2% target, data on Friday showed.
Traders expect a roughly 60% chance of a rate cut in September, compared to 49% before the report.
“If the Fed can cut because it can, not because it has to avoid a recession, markets should do well,” said Brian Jacobsen, chief economist at Annex Wealth Management.
“The market will grow impatient with the Fed as growth data suggests the Fed is waiting too long to recalibrate interest rates.”
The index, which measures the US currency against six other currencies, rose 0.1% to 104.67. The index fell 1.56% in May but rose 3% during the year.
Investors' attention this week will be on the ISM manufacturing survey later in the day, as well as payrolls data on Friday to gauge the strength of the US labor market.
“If the unemployment rate rises, it could be a sign that the US labor market is not as tight as some think, which could lead to further recalibration in interest rate expectations and even some dollar weakness as we head into the weekend.
The British pound fell 0.2% to $1.27215, while the euro fell slightly to $1.0844 ahead of the European Central Bank's policy meeting on Thursday when it looks almost certain that the central bank will cut interest rates.
ECB officials' comments will be a focus for traders alongside the economic outlook as they assess whether the central bank will deliver further cuts after Thursday in the wake of data that showed euro zone inflation rose in May.
Markets are pricing in 57 basis point cuts this year from the European Central Bank.
Standard & Poor's on Friday lowered France's sovereign credit rating by one notch to “AA-,” citing expectations that a higher-than-expected deficit would lead to higher debt in the euro zone's second-largest economy.
Meanwhile, data released on Friday showed that Japanese monetary authorities spent 9.79 trillion yen ($62.23 billion) to intervene in the foreign exchange market to support the yen over the past month.
The yen is the worst performing major currency against the dollar this year, losing 10% of its value.
On Monday, the yen was little changed against the dollar at 157.18, close to last week's four-week low of 157.715.