Euro, sterling hold onto gains against US dollar

On Thursday, the pound and the euro maintained their gains against the US dollar from the previous day, buoyed by soft economic data that had weakened the greenback, as voting began in Britain and the second round of the French election drew closer.

Sterling was last at $1.2757, up 0.1%, after gaining 0.46% on Wednesday and reaching a three-week high. The euro was at $1.080, up 0.1% after a gain of 0.4%, also at a three-week top.

The pound is now up for the year against the US dollar, making it the best-performing G10 currency in 2024.

US dollar pressured by soft economic data

The dollar was pressured by softer-than-expected U.S. economic data on Wednesday, including a weak services report and an ADP employment report, indicating a slowing economy following an increase in initial unemployment benefit applications last week.

Jane Foley, head of FX strategy at Rabobank, was cited by Reuters as saying: 

“The data is feeding expectations that maybe the labour market is weakening and the Fed will be able to cut rates later in the year”.

According to the news agency, markets are now anticipating nearly 50 basis points of Federal Reserve interest rate cuts in 2024, likely starting with a 25-basis-point move in September and another by year-end — bets which also brought down US Treasury yields.

The most important monthly US labor market data, non-farm payrolls, due on Friday, is expected to show an increase of 190,000 jobs in June after a rise of 272,000 in May, according to a Reuters poll of economists.

US markets are closed on Thursday for the July 4 holiday.
 

Big Labour win expected in UK election on Thursday

British voters are heading to the polls on Thursday, with Labour Party leader Keir Starmer expected to become the next prime minister, sweeping Rishi Sunak's Conservative Party out of office after a 14-year stint.

Foley noted two main reasons for the limited market reaction to the elections and campaign drama. She told Reuters:

"Firstly, Labour has been consistently ahead in opinion polls for some time, so there has been no shock. The second reason is Keir Starmer and Rachel Reeves have done quite a good job at convincing investors and the electorate that they have moved the party into the center ground."

Reeves is the Labour Party's finance policy chief.

Markets.com Chief Market Analyst Neil Wilson pointed to the lack of volatility by saying that had markets pricing in a Labour win but added that the potential economic effects of a Starmer-led government may not yet be clear: 

“For what it’s worth, I don’t think we see massive moves on the [UK election] results. A thumping Labour win seems fully priced in — but we are not sure if the market is ready for what that will mean”.

Wilson expanded on the Labour economic policy in an earlier note ahead of the election on Wednesday:

“’Securonomics’ is untested and may be more radical than people realise. But the market might not react in the same way. The problem with Truss was policy uncertainty ratcheted up to the max — a Labour government is expected to deliver more clarity. We shall see if that is how it works. UK interest rates are set to come down soon, which will provide cover. If the market sniffs a genuine growth agenda alongside rate cuts, we could see the FTSE 250 outperform”.

Market uncertainty eases ahead of French election

Analysts also pointed to uncertainty about the French elections, with a runoff set for Sunday.

Market nerves have eased somewhat, and the closely watched gap between German and French 10-year yields has narrowed to less than 70 basis points, having been above 80 bps before the first round of voting last week.

Francesco Pesole, FX strategist at Dutch bank ING, attributed this to numerous center and left-wing candidates dropping out of three-way runoffs to curb prospects for Marine Le Pen's right-wing National Rally party. He wrote in a note on Thursday:

"This raises the chances of a hung parliament, which appears a more desirable outcome for markets as it limits the chances of aggressive spending maneuvers. Our rates team continues to call for structurally wider French spreads, and we expect that to weigh on the euro throughout the summer”.

Japanese yen ticks up on weak US dollar but remains close to 38-year lows

The struggling Japanese yen, which failed to gain much traction on Wednesday, edged up on Thursday, with the US dollar down 0.36% at 161.11 yen.  

It remained close to a trough of 161.96 per dollar hit in the previous session, its lowest since December 1986, with fundamentals stacked against the currency.

Traders were preparing for possible Japanese government currency intervention, with US markets closed for the July Fourth holiday. Tokyo's previous two rounds of yen buying occurred during illiquid trading periods or holiday-thinned markets.

However, the hurdle for yen intervention may be higher at this stage, according to a comment from Marito Ueda, general manager of the market research department at SBI Liquidity Market, cited by Reuters:

"The Ministry of Finance is saying the trigger for intervention is not the level, but if there are excessive moves. It's hard to step in since current moves don't fall into that category”.

The US dollar index (DXY), a gauge of the greenback’s strength against multiple major currencies, was down 0.2% at 105.2. Despite the slide, the DXY index remains up 3.81% year-to-date.

When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.  

Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.