Dollar stands tall as traders mull Fed outlook; focus on ECB

Dollar stands tall as traders mull Fed outlook; focus on ECB

By Amanda Cooper

LONDON (Reuters) -The dollar held steady on Monday, as investors warmed to the idea that U.S. inflation may have slowed enough for the Federal Reserve to cut rates in 2024, while the euro was calm ahead of an expected cut from the European Central Bank this week.

Among emerging market currencies, the Indian rupee and Mexican peso strengthened following exit poll results from general elections in both countries. [EMRG/FRX]

The Indian rupee, the best performing Asian currency this year, was last at 83.118 per dollar as exit polls pointed to a sizable mandate and rare third term for Prime Minister Narendra Modi.

The Mexican peso weakened on Monday after the ruling party declared Claudia Sheinbaum the winner of the presidential election by a “large margin” after polls closed on Sunday.

“This is a mega week for financial markets,” Kathleen Brooks, research director at trading platform XTB, said, citing the ECB rate decision and Mexican election as factors.

The dollar posted its first monthly decline of the year in May, weighed down by shifting expectations on when the U.S. central bank will cut rates and by how much, with markets pricing in 37 basis points of cuts this year from the Fed.

Data on Friday showed a measure of consumer inflation staged a modest rise in April and price pressures remained above the central bank’s 2% target.

Traders are pricing in about a 60% chance of a September rate cut, versus 49% before the report.

“If the Fed can cut because they can, rather than because they have to stave off a recession, the markets should do well,” said Brian Jacobsen, chief economist at Annex Wealth Management.

“The market will get impatient with the Fed’s patience since the growth data suggests the Fed is waiting too long to recalibrate rates.”

The dollar index, which measures the U.S. currency against six others, was up 0.1% at 104.67. The index fell 1.56% in May but is up 3% for the year.

Investor attention this week will be on the ISM manufacturing survey later in the day, as well as payrolls data on Friday to gauge the strength of U.S. labour market.

“If the unemployment rate does tick up, then it could be a sign that the US labour market is not as tight as some think, which could lead to a further recalibration in rate expectations and even some dollar weakness as we move towards the weekend.

Sterling fell 0.2% to $1.2715, while the euro was 0.12% lower at $1.0834 ahead of an ECB policy meeting on Thursday when the central bank is seen as almost certain to cut rates.

The comments from ECB officials will be in focus for traders along with economic projections as they assess whether the central bank will provide further cuts after Thursday in the wake of data showing a rise in euro zone inflation in May.

Markets are pricing in 57 basis points of cuts this year from the ECB.

S&P on Friday cut France’s sovereign credit rating by one notch to “AA-“, citing expectations that higher than expected deficits would push up debt in the euro zone’s second-biggest economy.

Meanwhile, data released on Friday showed Japanese monetary authorities spent 9.79 trillion yen ($62.23 billion) intervening in the foreign exchange market to support the yen over the past month.

On Monday, the yen strengthened and pared earlier losses, pushing the dollar down 0.26% on the day at 156.82, pulling further away from last week’s four-week low of 157.715.

The yen is by far the worst-performing major currency against the dollar this year, with a loss of 10% in value.

(Additional reporting by Ankur Banerjee in Singapore; Editing by Kim Coghill and Bernadette Baum)