Euro a touch lower post French vote

The dollar lost more ground on Friday after the release of the June employment report in the US prompted some hardening of market expectations for a September rate cut from the Fed. The euro and sterling closed out Friday pretty much at their highs of the week against the US currency at $1.0840 and $1.2815 respectively, while EURGBP ended slightly lower on the day at about £0.8460. The euro is only marginally lower this morning (at $1.0825 and 84.5p respectively) following the surprise outcome of yesterday’s second round of voting in the French elections. This saw the far-right National Rally beaten into third place, behind the left-wing alliance in first place followed by Macron’s centrist alliance in second. With none of the three coming anywhere close to having an absolute majority, it’s unclear if and how a government can be formed, pointing to political gridlock in the country in the period ahead (although from the markets’ perspective at least, this still may be more preferable than if either the left-wing alliance or the far-right had been able to govern on their own).

Friday’s employment report also triggered a further decline in US government bond yields, with 2- and 10-year yields closing around 10bps and 8bps lower respectively. This spilled over elsewhere, as equivalent German and UK yields fell by 5-7bps on the day. Meanwhile, French government 10-year bonds yields are a little higher at the start of play today, although this is in line with slightly higher German yields as well this morning, while French stocks are underperforming a touch with the CAC 40 down around 0.6% in early trading.

The US economy added 206k jobs in June according to Friday’s data, slightly ahead of expectations, but job gains over the two previous months were revised down by a net 111k, while the unemployment rate rose for a third month in a row to 4.1% (up from a low of 3.4% at the start of 2023). Wage growth also eased last month, with the y-o-y growth in hourly earnings dipping to 3.9% from 4.1% in May. Post the data, the market now sees a circa 70% chance of a 25bps rate cut at the Fed’s next but one meeting in September.

ECB member Muller says if Euro area inflation evolves in line with the central bank’s latest projections, “then we most likely can further reduce the level of policy restrictiveness (i.e. lower interest rates) this year”, though “when exactly and by how much remains to be seen.”

The key economic release this week is the June CPI report in the US on Thursday – the headline rate of inflation is seen falling to 3.1% from 3.3% in May, according to the consensus forecast, but core inflation is expected to have held steady at 3.4%. Before that, Fed Chair Powell testifies on the US economy and monetary policy to the Senate Banking Committee on Tuesday, which will be an important speech ahead of the Fed’s next interest rate meeting at the end of this month.

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