Dollar holds steady on rate cut prospects, ECB in focus

by Jonathan Adams

The index dropped 1.56% in May but is 3% higher for the year

The dollar held steady on Monday, as investors warmed to the idea that U.S. inflation may have slowed enough for the Fed to cut rates in 2024, while the euro was steady ahead of an expected cut from the ECB this week.

Among emerging market currencies, the Indian rupee and Mexican peso firmed after exit poll results from general elections in both countries.

The Indian rupee, the best performing Asian currency this year, was at 83.035 per dollar as exit polls pointed to a sizable mandate and rare third term for Prime Minister Narendra Modi.

The Mexican peso softened 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 European Central Bank rate decision and Mexican election as factors.

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

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

Traders are pricing in around a 60% probability 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, according to Brian Jacobsen, chief economist at Annex Wealth Management.

The market will get impatient with the Fed’s patience since the growth data indicates the Fed is waiting too long to recalibrate rates, he said.

The dollar index was 0.1% higher to 104.67. The index dropped 1.56% in May but is 3% higher 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, he added.

Sterling shed 0.2% to $1.27215, while the euro was down at $1.0844 ahead of the European Central Bank policy meeting on Thursday when the central bank is seen as almost certain to reduce rates.

Disclaimer: The opinions expressed by our writers are their own and do not represent the views of Trading and Investment News. The information provided on Trading and Investment News is intended for informational purposes only. Trading and Investment News is not liable for any financial losses incurred. Conduct your own research by contacting financial experts before making any investment decisions.

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