By Alun John and Ankur Banerjee
LONDON/SINGAPORE (Reuters) – The euro fell sharply on Monday, hit by political uncertainty after far-right gains in Sunday's European Parliament vote prompted French President Emmanuel Macron to call early general elections.
Uncertainty in France adds another element to what will be a busy week for markets, with crucial US inflation data due on Wednesday, the same day as the Federal Reserve's policy meeting, followed by the Bank of Japan's meeting that concludes the week.
The euro fell 0.6% against the dollar to $1.0733, its lowest level since May 9. It also fell by 0.4% against the pound sterling to its lowest level in nearly two years at 84.53 pence, and in the most recent trading fell by 0.6% against the Swiss franc in seven weeks. The lowest level is 0.9626 francs.
“The election results over the weekend in the EU largely showed a rise in support for right-wing parties, which was generally expected, but the surprising element is that Macron reacted by calling a snap election, making the market even more nervous,” he said. Lee Hardman, Senior Currency Analyst at MUFG.
“This has reinforced the sell-off in the euro that we saw at the end of last week, and the other factor on top of that is that the US jobs report was very strong, which increases the risk of a hawkish policy signal from the Fed when it meets on Friday. Wednesday.”
The Fed is scheduled to conclude its two-day policy meeting on Wednesday. Data on Friday showed that non-farm payrolls increased by 272,000 jobs last month, much more than expectations in a Reuters poll of 185,000 jobs.
Markets are now pricing in Fed rate cuts of 36 basis points this year compared to about 50 basis points – that's two 25 basis point cuts – before the jobs data.
US consumer inflation data will be another factor in the Fed's decision-making process. While no policy change is expected during the meeting, the Fed will release its latest set of policymakers' “dotted” forecasts for the path of interest rates.
In the last such release in March, the average expectation was for interest rates to be cut by 25 basis points this year. Investors will be watching to see how much this report is revised downward.
Reduced expectations for interest rate cuts have been supporting the dollar through most of 2024, with the Japanese yen particularly suffering.
The dollar rose in recent transactions 0.1% against the Japanese currency to 156.85 yen, after jumping 0.7% on Friday after the release of the jobs report. With the pound falling 0.14% to $1.2705, the pound – which tracks unity against six major currencies – rose 0.22% to 105.29, the highest level in one month.
The focus will also be on Japan this week, as the Bank of Japan is scheduled to hold its two-day monetary policy meeting on Thursday and Friday, and the central bank is widely expected to keep short-term interest rates in the 0-0.1% range. .
Reuters reported last week that policymakers at the Bank of Japan are considering ways to slow bond buying and may provide new guidance.
Market speculation is growing that the Bank of Japan may adjust its bond purchasing arrangements, and if the central bank fails to meet these bets, the yen could come under further pressure.
“Without any hawkish surprise, the Japanese yen may initially be sold off after the policy announcement, similar to what we saw after past meetings,” analysts at Nomura Bank said in a note.
“Moreover, in the event of cautious surprises, for example, if the Bank of Japan avoids reducing its purchases of Japanese government bonds or reduces its purchases (of Japanese government bonds) very slightly, there is a risk that it may exceed the potential intervention zone again, as we saw. In April.”
Japanese officials spent about 9.8 trillion yen on currency intervention to support the currency in April and May.
($1 = 156.9 yen)