By Ankur Banerjee
SINGAPORE (Reuters) -The dollar was broadly steady on Monday as traders wagered that U.S. inflation may have stabilised enough for the Federal Reserve to cut rates later in 2024, while the euro was calm ahead of the 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 83.035 per dollar as exit polls pointed to a sizable mandate and a rare third term for Prime Minister Narendra Modi.
The Mexican peso rose to 16.95 after the country’s ruling party declared Claudia Sheinbaum the winner of the presidential election by a “large margin” after polls closed on Sunday.
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 the personal consumption expenditures (PCE) price index increased 0.3% in April, matching the unrevised gain in March. Traders are pricing in about a 53% chance of a September rate cut, versus 49% before the report.
The inflation data still shows price pressures remain above the Fed’s 2% target, with the year-over-year rise in the PCE index measuring 2.7% in April, the same rate as in March, keeping the markets unsure of more than one rate cut in 2024.
“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 rivals, was at 104.58 on Monday. 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.
Sterling was 0.04% higher at $1.2748, while the euro last fetched $1.08555 ahead of the 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.
Paul Mackel, global head of FX research at HSBC, said the euro’s direction will depend more on what ECB President Christine Lagarde has to say, especially if wage growth will be consistent with the central bank’s target.
“If so, it could lead to a further recalibration of market rate expectations and weaken the euro.”
Markets are pricing in 57 basis points of cuts this year from the ECB.
Meanwhile, data released on Friday by Japan’s Ministry of Finance confirmed that the authorities spent 9.79 trillion yen ($62.23 billion) intervening in the foreign exchange market to support the yen over the past month.
The data confirmed the suspicions of traders and analysts that Tokyo entered the market in two rounds of massive dollar-selling intervention shortly after the yen hit a 34-year low of 160.245 per dollar on April 29, and again in the early hours of May 2 in Tokyo.
The yen slid a bit to 157.42 per dollar on Monday, not far from the four-week low of 157.715 it touched last week.
(Reporting by Ankur Banerjee in Singapore; Editing by Jamie Freed and Kim Coghill)
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