The euro fell sharply on Monday, reaching a one-month low against the dollar, as political uncertainty gripped markets following significant gains by far-right parties in the European Parliament elections. This development prompted French President Emmanuel Macron to call a snap national election, adding to an already tumultuous week for global markets.
Political Uncertainty Weighs on the Euro
The euro hit a one-month low of $1.0748 against the dollar and was last trading 0.35% lower at $1.0764. The common currency also saw declines against other major currencies, dropping 0.33% against the British pound and hitting a near two-year low of 84.51 pence. It was also down 0.22% against the Swiss franc, touching a seven-week low of 0.9639 francs.
Lee Hardman, a senior currency analyst at MUFG, commented on the situation: "The election results over the weekend from the EU largely showed a pick-up in support for the right-wing parties, generally what was expected, but the surprise element is that Macron has reacted by calling a snap election, so that makes the market more nervous. That's reinforced the sell-off in the euro that we saw at the end of last week, and the other factor on top of that is the U.S. payrolls report was very strong, which increases the risk of a hawkish Fed policy signal when they meet on Wednesday."
Busy Week for Markets
The euro's decline comes amid a busy week for financial markets, with critical U.S. inflation data due on Wednesday, coinciding with a Federal Reserve policy meeting. The Bank of Japan will conclude the week with its monetary policy meeting. The robust U.S. non-farm payrolls report, which showed an increase of 272,000 jobs last month (well above the expected 185,000), has led markets to price in fewer Fed rate cuts this year. Currently, 36 basis points of cuts are anticipated, compared to nearly 50 basis points before the jobs data.
Federal Reserve and Inflation Data
Investors are keenly watching the Federal Reserve's two-day policy meeting, where, although no immediate policy shift is expected, the Fed will release its latest 'dot plots'—projections of future interest rates. In March, the median projection was for three 25-basis-point rate cuts this year. Any revisions in these projections could significantly impact market expectations and the dollar's performance.
Japanese Yen and BOJ Meeting
The Japanese yen also experienced pressure, with the dollar up 0.15% at 157 yen, following a 0.7% jump on Friday. The Bank of Japan's meeting will be closely watched, with speculation about potential changes to its bond-buying program. Nomura analysts noted, "Without any hawkish surprise, JPY may be sold initially following the policy announcement, similar to what we have seen after the past meetings. Moreover, in the case of dovish surprises... there is a risk that USD/JPY could overshoot to possible intervention territory again."
As markets navigate a week filled with significant economic data releases and policy meetings, the political developments in France have added another layer of complexity. The euro's decline reflects the heightened uncertainty and the potential for continued volatility in the days ahead.
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Source: Reuters