The U.S. dollar experienced a slight dip on Friday, along with the euro, as both currencies faced challenges amidst political turmoil in the region. At 04:20 ET (08:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 105.125. Despite these minor losses, the dollar is set to make modest gains this week following the Federal Reserve’s decision to keep the funds rate on hold at 5.25%-5.5%. The Fed also reduced the number of projected rate cuts this year to just one, down from three in March.
Uncertainty Clouds Dollar’s Future
The dollar’s gains are being limited by weaker-than-expected U.S. consumer and producer prices, indicating a decrease in inflationary pressures. Furthermore, new claims for unemployment benefits reached a 10-month high last week. Although the Fed’s June dot plot suggests only one rate cut in 2024, Goldman Sachs predicts a rate cut as early as September, with a second cut in December. The bank’s inflation forecast for 2024 is slightly below the FOMC’s projection, which Chair Powell described as “fairly conservative.” If the next rounds of inflation data continue to show improvement, a rate cut in September seems likely.
The EUR/USD pair fell 0.3% to 1.0708, signaling a weekly loss of approximately 0.8%. The euro is facing challenges due to political instability in the European region, particularly after far-right parties made significant gains in European Parliament elections. French President Emmanuel Macron responded to the rise of the right-wing National Front party by calling for a snap election in France. This move led to further declines in the euro. The rare cooperation of left-wing parties in France could impact President Macron’s party, as they consider forming a coalition and running joint candidates in upcoming elections.
GBP/USD fell 0.2% to 1.2729, but is on track for slight gains this week. Stronger-than-expected inflation data in Britain prompted investors to delay their expectations for BoE rate cuts until later in 2024. The upcoming release of the May U.K. CPI data and the Bank of England’s policy meeting next week will provide further insight into the economic situation in the United Kingdom.
In Asia, USD/JPY traded 0.3% higher at 157.56 after the Bank of Japan’s decision to maintain its current policy stance disappointed markets. The uncertainty surrounding policy decisions in major economies like Japan adds to the volatility in the currency markets, impacting the overall sentiment towards the U.S. dollar and other major currencies.
The political turmoil in Europe continues to influence the performance of the euro and the U.S. dollar. While the dollar is facing challenges due to weakening economic indicators in the U.S., the euro is struggling to maintain stability amidst political uncertainties in the region. Investors are closely monitoring upcoming economic data releases and central bank meetings to gauge the future direction of these major currencies.