Stefano Rebaudo
(Reuters) – The euro fell to a one-month low on Tuesday on political worries as investors turned their attention to U.S. inflation data and the Federal Reserve’s interest rate forecasts.
The single currency lost ground on Monday, weighed down by investor concerns that Eurosceptic success in European elections and the calling of early elections in France could complicate the European Union’s efforts to deepen integration.
Meanwhile, the dollar was supported by higher Treasury yields following strong US employment data last Friday.
Also in focus is the Bank of Japan’s policy meeting on Friday. While investors expect the central bank to cut monthly government bond purchases, the wide yield differential with the US is putting the yen on the defensive.
“US inflation data and the Fed dot plot (interest rate forecasts) will be the focus of the forex market this week,” said Athanasios Vamvakidis, global head of forex strategy at BofA.
“The elections in France are extremely important, but we have to see how they go; and no matter what the polls say, we will have to wait for the second round.”
The euro hit a one-month low of $1.0725 and was last down 0.3% at $1.0731.
The index, which measures the U.S. currency against the euro, pound, yen and three other rivals, rose 0.2% to 105.39, its highest since May 14.
“Worries about the prospects for the rise of right-wing populists in Europe are usually linked to euro-dollar weakness, as was the case in 2017,” said Macquarie global FX strategist Thierry Wiseman.
“We expect the same pressure now. This is one of the reasons why we maintain our view that the euro-dollar will reach 1.05 and stay there.”
The far-right National Rally party was forecast on Monday to win early elections in France but fall short of an outright majority in the first opinion poll released since Macron’s shock decision to dissolve parliament.
MUFG’s Derek Halpenny expects a test of the lower end of the euro-dollar trading range between 1.0500 and 1.1000 ahead of the first round of elections in France “as market participants look to increase the European Union’s 2.5% political risk premium . 3%”.
Sterling hit a 22-month high against the euro and was little changed against the dollar.
Economists polled by Reuters expect headline U.S. consumer price inflation to fall to 0.1% from 0.3% last month and for core price pressures to remain steady at 0.3%.
The Fed is expected to maintain the status quo at the end of its two-day meeting on Wednesday, but officials will update their economic and interest rate forecasts.
If the Fed’s forecasts reflect just one expected rate cut in 2024, the market will take it as a hawkish signal from the committee and could trigger another sharp rise in the dollar, analysts say.
In this scenario, Fed Chairman Jerome Powell could downplay the so-called dot plot, which could limit the dollar’s upside potential.
BofA expects Powell to argue that the U.S. central bank can be patient in determining when to adjust its policy rate.
Markets are forecasting a 37 basis point contraction by December, implying about a 50% chance of a second contraction this year.
The dollar strengthened 0.05% to 157.12 yen after hitting its highest since June 3 at 157.43.
Investors expect the Bank of Japan to cut bond purchases by 1 trillion yen ($6.4 billion) to about 5 trillion yen per month.
“If US data remains strong, even intervention will not be able to stop the further strengthening of the dollar against the yen; it will simply provide temporary relief for the Japanese currency,” said BofA’s Vamvakidis.
The currency’s fall to a 34-year low of 160.245 per dollar in late April triggered several rounds of official Japanese intervention amounting to 9.79 trillion yen.
($1 = 157.1400 yen)