By Brigid Riley and Alun John
Tokyo and London (Reuters)
As voting started in Britain and the French election approached, the pound and the euro strengthened their positions against the dollar on Thursday following a decline in the dollar due to disappointing U.S. economic data.
Currency Movements
Pound and Euro Performance
- Euro: The euro rose to $1.0801, marking a 0.1% increase after a 0.4% rise on Wednesday, hitting a three-week high.
- Pound: Sterling was marginally higher at $1.2757, having gained 0.46% the day before. The pound has outperformed the dollar year over year, making it the best-performing G10 currency in 2024.
Impact of U.S. Economic Data
The dollar’s drop followed weaker-than-expected U.S. economic data, including a spike in first applications for unemployment benefits, an ADP employment report, and a negative services report, indicating a weakening economy.
Expert Insights
Jane Foley, head of FX strategy at Rabobank, commented, “The data is feeding expectations that maybe the labor market is weakening and the Fed will be able to cut rates later in the year.”
Interest Rate Projections
- Federal Reserve: Markets now project approximately 50 basis points of interest rate reductions from the Federal Reserve in 2024, likely starting with a 25 basis point move in September and another by year-end. This expectation has also led to a decline in U.S. Treasury rates.
Upcoming Economic Reports
According to a Reuters survey of experts, the non-farm payrolls report, the most significant monthly release of information on the U.S. labor market, is predicted to show a gain of 190,000 jobs in June, down from a gain of 272,000 in May. Due to the July 4th holiday, U.S. markets are closed on Thursday.
Political Context
British Election
British voters are certain to elect Keir Starmer, the leader of the Labour Party, as the next prime minister, ousting Rishi Sunak’s Conservatives after 14 years.
Market Response
Foley noted two primary reasons for the market’s muted response to the election announcement:
- Labour’s consistent lead in opinion polls.
- Starmer and Rachel Reeves’ success in convincing investors and the electorate of their centrist position.
French Election
Analysts noted more ambiguity surrounding the French elections, with a run-off scheduled for Sunday. The margin between German and French 10-year rates has shrunk, indicating reduced market anxiety.
Yen Movement
The dollar fell 0.33% to 161.18 yen on Wednesday, with the struggling Japanese yen gaining momentum. The yen remains close to its lowest level since December 1986. Traders are cautious of potential currency intervention by the Japanese government during periods of low liquidity.
FAQs
Why are the pound and euro strengthening against the dollar?
The pound and euro are strengthening due to disappointing U.S. economic data, leading to expectations of potential rate cuts by the Federal Reserve.
How do U.S. interest rate projections impact the dollar?
Expectations of rate cuts by the Federal Reserve lead to a decline in U.S. Treasury rates, weakening the dollar.
What is the impact of the British and French elections on the currency market?
The British election has had a muted market response due to Labour’s consistent lead in polls, while the French election has introduced some ambiguity, affecting the euro.
Why is the yen gaining momentum against the dollar?
The yen is gaining momentum due to potential currency intervention by the Japanese government during periods of low liquidity.
