Stefano Rebaudo
(Reuters) – The dollar struggled for direction on Wednesday while the euro remained close to recent lows on concerns that the new government in France could weaken fiscal discipline, raising debt risk premiums across the euro zone.
Meanwhile, sterling rose after data showed UK services inflation was stronger than expected.
US markets are closed on Wednesday, which will likely lead to subdued trading.
The dollar fell overnight as U.S. retail sales suggested economic activity remained sluggish and the Federal Reserve was more likely to cut rates.
The euro rose 0.1% to $1.0746; On Friday, it hit a one-and-a-half-month low at $1.07.
The yield gap between French and German government debt, now seen as an indicator of the risk of a fiscal crisis in the heart of Europe, narrowed slightly since Monday but remained close to the seven-year high reached last week.
Analysts noted that the single currency is far from any serious threat to the financial stability of the eurozone bloc.
“The very limited movement in the FX market, in contrast to the movement in the OAT (French government bond yield) spread, highlights the fact that the reaction is more about a repricing of fixed income risks,” said Derek Halpenny, head of global markets research at MUFG.
National Rally Party (NR) leader Marine Le Pen has said she is committed to coexistence with President Emmanuel Macron and will respect institutions, raising expectations that the NR could abandon financially costly commitments if it wins the election at the beginning of July.
The European Central Bank could also buy French bonds to avoid an “unjustified and disorderly” widening of yield spreads. However, ECB chief economist Philip Lane said the recent market turmoil “was not disorderly.”
The European Commission on Wednesday proposed widely expected disciplinary measures against France, Italy and five other European Union countries for running excessive budget deficits.
The price remained unchanged at 105.20.
Markets are currently pricing the likelihood of the Fed cutting rates in September at about 65%, according to CME’s FedWatch tool, with rates expected to cut nearly 50 basis points this year.
Sterling rose 0.1% against the euro to 84.43 pence per euro and 0.13% against the dollar at $1.2725 after British data showed underlying price pressures remained strong.
“The important thing now is how the Monetary Policy Committee places its weight on the immediate – and perhaps retrospective – data,” said Sanjay Raja, chief UK economist at Deutsche Bank Research, recalling that the survey data was “more encouraging.”
Markets have priced the likelihood of a Bank of England rate cut in August at around 25%, up from 50% before the data, and 44 basis points of monetary easing in 2024, up from almost half a percentage point before the data.
The Bank of England will hold its policy meeting on Thursday.
The Swiss franc hit a seven-month high against the euro at 0.9479 and was last down 0.1% at 0.9503.
The single currency has weakened steadily against the Swiss currency since late May, when it hit 0.9930 per franc, its highest level since April 2023.
“Some observers see this as a new threat of intervention or as an implicit putt that (Swiss National Bank Chairman Thomas) Jordan is offering to all market participants who are long the Swiss franc, especially against the euro,” said Ulrich Leuchtmann, head of the foreign exchange divisions. strategy at Commerzbank (ETR:), recalling Jordan’s performance at the end of May.
Jordan argued that inflation risks would likely come from a weakening Swiss franc, which the SNB “could counter by selling foreign currency.”
The Bank of Australia expects the SNB to implement a second cut of 25 bps. next week and will declare its readiness “to be active in the foreign exchange market if necessary.”
The Australian dollar rose 0.29% to $0.6675 against the US currency, also helped by an aggressive message from Reserve Bank of Australia Governor Michelle Bullock following the central bank’s interest rate decision on Tuesday.
The yen was little changed at 157.925 per dollar as it continued to come under pressure, particularly from sharp differences in interest rates between Japan and the United States.
Analysts say the Bank of Japan tightening monetary policy is on the horizon, but the Bank of Japan will act slowly.