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Dollar Holds Steady Amid Fed Speculation; Euro Awaits ECB Rate Decision

The U.S. dollar maintained its strength on Monday as investors speculated that U.S. inflation might have eased enough to prompt the Federal Reserve to cut interest rates in 2024. Meanwhile, the euro remained stable ahead of an anticipated rate cut from the European Central Bank (ECB) later this week.

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Emerging Market Currencies

Among emerging market currencies, the Indian rupee and Mexican peso showed mixed reactions following exit poll results from general elections in their respective countries. The Indian rupee, currently the best-performing Asian currency this year, stood at 83.035 per dollar, bolstered by exit polls indicating a significant mandate and a rare third term for Prime Minister Narendra Modi.

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Conversely, the Mexican peso weakened after the ruling party declared Claudia Sheinbaum the winner of the presidential election by a “large margin” following Sunday’s polls.

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Market Dynamics and Federal Reserve Outlook

Kathleen Brooks, research director at trading platform XTB, highlighted the significance of this week for financial markets, pointing to the ECB rate decision and the Mexican election as key factors.

The dollar experienced its first monthly decline of the year in May, influenced by changing expectations regarding the timing and extent of the Federal Reserve’s rate cuts. Markets are currently pricing in 37 basis points of cuts from the Fed this year. Data released on Friday showed a modest rise in consumer inflation for April, with price pressures remaining above the Fed’s 2% target.

Traders now see about a 60% chance of a rate cut in September, up from 49% before the inflation report. Brian Jacobsen, chief economist at Annex Wealth Management, suggested that if the Fed can cut rates proactively rather than reactively to stave off a recession, markets should perform well. However, he noted that the market might grow impatient with the Fed’s cautious approach, given robust growth data.

The dollar index, which measures the U.S. currency against six others, increased by 0.1% to 104.67. Despite a 1.56% decline in May, the index is up 3% for the year.

Upcoming Economic Data and ECB Decision

Investor attention this week will focus on the ISM manufacturing survey and payrolls data due on Friday to gauge the strength of the U.S. labor market. A rise in the unemployment rate could signal a less tight labor market, potentially leading to a reassessment of rate expectations and some dollar weakness.

The euro edged lower to $1.0844 ahead of the ECB policy meeting on Thursday, where the central bank is widely expected to cut rates. Comments from ECB officials and economic projections will be closely watched to assess the likelihood of further cuts following data showing a rise in eurozone inflation in May. Markets are currently pricing in 57 basis points of cuts from the ECB this year.

Other Currency Movements

Sterling fell by 0.2% to $1.27215. On Friday, Standard & Poor’s downgraded France’s sovereign credit rating by one notch to “AA-“, citing concerns that higher-than-expected deficits would increase debt in the eurozone’s second-largest economy.

In Japan, data released on Friday revealed that monetary authorities spent 9.79 trillion yen ($62.23 billion) intervening in the foreign exchange market to support the yen over the past month. The yen has been the worst-performing major currency against the dollar this year, losing 10% of its value. On Monday, the yen was little changed at 157.18 per dollar, close to last week’s four-week low of 157.715.

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