Written by Ray Wee and Stefano Ribaudo
(Reuters) – The dollar stabilized on Wednesday, as weak US economic data affected strengthening US bets on lowering interest rates, but political tensions in Europe provided some support by weakening the euro.
Meanwhile, the pound rose after data showed that services inflation in the UK was stronger than expected.
Data on Tuesday showed that US retail sales barely rose in May and the previous month's numbers were revised down, suggesting that economic activity remained tepid in the second quarter.
That pushed the US currency lower, although it later regained some strength against a basket of currencies, as the euro, which carries the largest weight in the euro zone, remains under pressure from political turmoil in France and the broader bloc.
The euro fell slightly recently at $1.0732, while the dollar index settled at 105.27.
The yield gap between French and German government debt, now seen as a measure of the risk of a budget crisis in the heart of Europe, has narrowed slightly since Monday but remains 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 the Commonwealth Bank of Australia.
“Things are finally turning around. It looked like the American consumer would never slow down, but that appears to be exactly what has happened now.”
Markets now expect a 67% chance that the Fed will start easing interest rates in September, according to the CME FedWatch tool, with cuts of about 50 basis points expected this year.
The British pound rose 0.20 percent against the euro to 84.34 pence per euro and 0.15 percent against the dollar to $1.2725 after the data.
British inflation returned to its 2% target in May for the first time in nearly three years, but underlying price pressures remained strong, data showed on Wednesday.
“We think this (services inflation number) will raise the bar for interest rate cuts in August,” said Sanjay Raja, chief UK economist at Deutsche Bank Research.
“What matters now is how much buffer the MPC puts on the spot – arguably retrospective data,” he said, noting that the survey figures were “more encouraging”.
Markets had expected a probability of about 30% for a rate cut from the Bank of England in August, down from 50% before the data, and 44 basis points of monetary easing in 2024, down from nearly half a percentage point before the numbers.
The Bank of England holds its policy meeting on Thursday.
The Swiss franc recorded its highest level in seven months against the euro at 0.9475, up by 0.14%.
The euro has been declining continuously against the Swiss currency since the end of May, when it reached 0.9930 to the franc, its highest level since April 2023.
“Some observers see this as a renewed threat of intervention or as an implicit signal that (Swiss National Bank President Thomas) Jordan is offering to all market participants who hold long positions on the Swiss franc, especially against the euro,” said Ulrich Luchtmann, head of FX trading strategy. “. In Commerzbank (ETR:), recalling the speech Jordan gave at the end of May.
Jordaens said inflation risks were likely linked to a weaker Swiss franc, which the Swiss central bank could “counter by selling foreign currencies.”
The Australian dollar significantly outperformed against the US currency, also supported by the hawkish message from Reserve Bank of Australia Governor Michael Bullock following the central bank's interest rate decision on Tuesday.
The latter was up 0.12% at $0.6664, continuing its gains of 0.66% from the previous session. Meanwhile, the New Zealand dollar fell 0.19% to US$0.6133.
Elsewhere, the yen was little changed at 157.83 against the dollar, still under pressure from stark interest rate differentials between Japan and the US, in particular.
Bank of Japan Governor Kazuo Ueda said on Tuesday that the central bank may raise interest rates next month depending on the economic data available at that time.
Analysts said further policy normalization is on the horizon, but they expect the Bank of Japan to take a slow approach.
