Euro Drops as Macron Calls Snap Election, Dollar Steady

The euro fell significantly on Monday after French President Emmanuel Macron announced a snap election following a substantial defeat in the European Union elections to the far-right.

The euro declined to $1.0764, its lowest since May 9, and was last down 0.24% at $1.0776. This drop reflects investor concerns about renewed political instability in France, the euro zone’s second-largest economy, during a crucial election year.

Eurosceptic nationalists achieved notable gains in the European Parliament elections, leading Macron to take a bold step to reassert his authority. Mansoor Mohi-Uddin, Chief Economist at Bank of Singapore, stated, “The prospects of a far-right victory in France’s snap elections may keep the euro under pressure in the near term.”

However, he noted that the euro’s exchange rate is more likely influenced by upcoming U.S. inflation data and the Federal Open Market Committee (FOMC) meeting.

Dollar Steady with Upcoming Fed Meeting:

The dollar index, measuring the U.S. currency against six rivals, stood at 105.09, its highest since May 30. This followed a 0.8% rise on Friday after data revealed that the U.S. economy created more jobs than expected in May, with nonfarm payrolls expanding by 272,000 jobs.

This surpassed economists’ forecasts of 185,000 jobs.

Ryan Brandham, Head of Global Capital Markets for North America at Validus Risk Management, mentioned that signs of softening in the U.S. labor market had supported discussions of rate cuts in the latter half of 2024.

However, the robust job data has likely dampened those expectations. “The Fed has shown patience in waiting for the confidence that inflation will fully return to target before signaling rate cuts, and that caution seems warranted,” Brandham added.

Fed and Inflation Data in Focus:

Traders have adjusted their expectations regarding when the Fed will cut rates. They now price in 36 basis points of cuts this year compared to nearly 50 basis points before the job data release. The likelihood of a rate cut in September has decreased from around 70% to roughly 50%.

While no changes are expected from the Fed’s policy meeting this week, attention will be paid to Fed Chair Jerome Powell’s comments and any adjustments to economic projections.

U.S. inflation data, due on Wednesday, will also be closely monitored. Marc Chandler, Chief Market Strategist at Bannockburn Global Forex in New York, suggested, “We suspect that the median dot will fall from three cuts to less than two. A hawkish hold?”

Japanese Yen and Bank of Japan’s Stance:

The Japanese yen weakened to 156.95 in early trading on Monday, close to its 34-year low of over 160 per dollar reached in April, which prompted significant intervention by Japanese officials.

During its two-day monetary policy meeting, the Bank of Japan is expected to maintain short-term interest rates in the 0-0.1% range. Sources told Reuters that policymakers are reportedly considering ways to slow bond buying and may offer new guidance soon.

Sterling’s Performance:

Sterling remained flat at $1.2723, having touched a one-week low of $1.2700 earlier.

Overall, the financial markets are experiencing significant movements influenced by European political developments, robust economic data from the U.S., and upcoming central bank meetings and inflation reports.