The dollar steadied on Wednesday, as weak U.S. economic data weighed in boosting U.S. rate cut bets, and political concerns in Europe provided some support by weakening the euro.
Meanwhile, the pound sterling rose after data showed UK services inflation was stronger than expected.
U.S. retail sales barely rose in May and the previous month’s figures were revised downward, data showed Tuesday, suggesting economic activity remained lackluster in the second quarter.
The euro, which weighs the most in the dollar index, remains under pressure from political turmoil in France and across the European Union.
The euro was marginally lower at $1.0732, while the dollar index was flat at 105.27.
The yield gap between French and German public debt, which is now seen as an indicator of the risks of a fiscal crisis in the heart of Europe, has narrowed slightly since Monday, but remained near its highs of seven years reached last week.
“We thought US retail sales would be weak, and they have been,” said Joseph Capurso, head of international and sustainability economics at the Commonwealth Bank of Australia.
“Things are finally getting worse. It seemed like the American consumer was never going to slow down, but it seems like that’s exactly what’s happened now.”
According to the CME’s FedWatch tool, markets currently give a 67% chance that the Fed will begin easing rates in September, and expect cuts of nearly 50 basis points this year.
The pound sterling rose 0.20% against the euro, to 84.34 pence per euro, and 0.15% against the dollar, to $1.2725, after the data was released.
British inflation moved closer to its 2% target in May for the first time in almost three years, data showed on Wednesday, but underlying price pressures remained strong.
“We think this number (services inflation) will raise the bar for a rate cut in August,” said Sanjay Raja, chief UK economist at Deutsche Bank Research.
“What matters now is the importance that the Monetary Policy Committee places on one-off and arguably retrospective data,” he added, noting that the survey figures were “more encouraging.”
Markets have priced the chance of a Bank of England rate cut in August at around 30%, up from 50% before the data, and at 44 basis points for monetary easing in 2024, up from almost a half a percentage point before the numbers.
The BoE holds its policy meeting on Thursday.
The Swiss franc hit a new seven-month high against the euro at 0.9475, up 0.14%.
The euro has steadily weakened against the Swiss currency since the end of May, when it reached 0.9930 per franc, its highest level since April 2023.
“Some observers see this as a new threat of intervention or an implicit offer that (Swiss National Bank President Thomas) Jordan is making to all market participants who hold long positions in Swiss francs, particularly against the euro.” , said Ulrich Leuchtmann, head of foreign exchange strategy at Commerzbank, recalling a speech by Mr. Jordan at the end of May.
Mr Jordan said inflation risks would likely be associated with a weaker Swiss franc, which the SNB “could counter by selling foreign exchange”.
The Australian dollar was one of the strongest performers against the US currency, helped by Reserve Bank of Australia Governor Michele Bullock’s upbeat message after the central bank’s interest rate decision on Tuesday.
The Australian dollar was up 0.12% at $0.6664, extending its 0.66% gain from the previous session. Meanwhile, the New Zealand dollar fell 0.19% to $0.6133.
Elsewhere, the yen was little changed at 157.83 per dollar, as it continues to come under pressure from interest rate differences between Japan and the United States, in particular.
Bank of Japan Governor Kazuo Ueda said Tuesday the central bank may raise interest rates next month depending on economic data available at that time.
Analysts said further policy normalization was on the horizon, but they expected the BOJ to take a slow approach.
