July 1 2024: The U.S. dollar slipped in early European trade on Monday, ahead of the week’s key employment report, while the euro rallied after the first round of voting in the French elections.
At 05:30 ET (09:30 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.3% lower at 105.255, around a one-week low.
Dollar Slips Ahead of Payrolls Release
The dollar index has been weakened by the strength of the euro, which carries the largest weight in the basket, and was already impacted by softer-than-expected inflation data released on Friday.
The Federal Reserve’s preferred inflation measure, the personal consumption expenditures (PCE) index, showed a cooling in inflation, raising expectations that the U.S. central bank will begin cutting interest rates later this year.
With a U.S. holiday-shortened week due to Independence Day on Thursday, focus will be on Friday’s nonfarm payrolls report for indications on when the Fed might start to cut interest rates.
Economists expect the U.S. economy to have added 189,000 jobs in June, following a gain of 272,000 the previous month.
Ahead of the nonfarm payrolls data, a report on Tuesday is expected to show a decline in job openings in May. Wednesday sees the release of the minutes of the Fed’s June meeting, and Fed Chair Jerome Powell is set to speak at the European Central Bank’s annual forum in Portugal.
Euro Gains After First Round of French Elections
EUR/USD rose 0.5% to 1.0765, around a two-week high, after the French far right’s performance in the first round of parliamentary elections was slightly below some expectations.
Marine Le Pen’s far-right National Rally party won the first round of France’s parliamentary elections on Sunday, claiming 33% of the national popular vote. The leftwing New Popular Front came in second with 28%, while President Emmanuel Macron’s centrist bloc reached 20%.
The margin of the National Rally’s win was tighter than expected, leaving the final result dependent on party deals before the weekend’s second round.
“First round results are not offering much certainty about the composition of the parliament, and the second round scheduled for next weekend is in fact the big risk event,” said analysts at ING in a note.
This political news overshadowed data showing manufacturing activity across the eurozone declined last month as demand fell at a much faster pace despite factories cutting prices.
GBP/USD rose 0.3% to 1.2673, with sterling rising despite data showing British manufacturing activity growth slowed in June.
S&P Global’s UK Manufacturing Purchasing Managers’ Index dropped to 50.9 in June from 51.2 in May, with the final reading lower than the provisional data of 51.4.
The U.K. general election takes place on Thursday, with the opposition Labour Party widely expected to win the keys to Downing Street.
“There has, indeed, been very little doubt about a Labour landslide win, so the election should not be a huge event for markets. We suspect that a stronger-than-expected result by populist/hard-Brexiteer Reform UK is the most tangible risk for some slight adverse reaction in GBP assets,” ING said.
Yen Remains Weak
In Asia, USD/JPY traded 0.1% higher to 161.02, remaining near its weakest levels in 38 years.
The Japanese government on Monday unexpectedly revised first-quarter gross domestic product data, showing a much deeper contraction than initially expected.
The reading presented a dour outlook for the Japanese economy and raised doubts over how much headroom the Bank of Japan has to begin tightening policy.
USD/CNY edged marginally higher to 7.2683, close to levels last seen in November.
Purchasing managers index data painted a mixed picture of the economy. Government PMI data on Sunday showed China’s manufacturing sector shrank for a second straight month in June, but private PMI data showed the sector growing at its fastest pace in three years.