The dollar struggled to gain direction on Wednesday, while the euro remained near recent lows on concerns that a new government in France could weaken fiscal discipline, raising the risk premium debt across the eurozone.
Meanwhile, the pound sterling rose after data showed UK services inflation was stronger than expected.
American markets are closed this Wednesday, which should result in a slowdown in trading throughout the day.
The greenback fell overnight as US retail sales suggested economic activity remains lackluster and the Federal Reserve will cut rates sooner.
The euro was up 0.1% at $1.0753; it reached its lowest level in a month and a half on Friday at $1.07.
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.
Analysts stressed that the single currency was far from posing a serious threat to the financial stability of the euro zone.
“The very limited evolution of the foreign exchange market compared to the evolution of the OAT (yield on French government bonds) underlines the fact that the reaction is more linked to a reassessment of the risks linked to fixed income”, a said Derek Halpenny, head of global markets research at MUFG.
The leader of the National Rally (RN), Marine Le Pen, said she sought to cohabit with President Emmanuel Macron and would be respectful of institutions, suggesting that the RN could renege on its costly promises on the tax plan if he wins the elections in early July.
The European Central Bank could also buy French bonds to avoid an “unjustified and disorderly” widening of the yield spread. However, Philip Lane, the ECB’s chief economist, said the recent market turmoil was not “messy”.
The European Commission on Wednesday proposed long-awaited disciplinary measures against France, Italy and five other European Union countries over excessive budget deficits.
The dollar index remained stable at 105.27.
According to the CME’s FedWatch tool, markets currently give a 65% chance that the Fed will begin easing rates in September, and expect cuts of nearly 50 basis points over the course of the year.
The pound sterling rose 0.10% against the euro, to 84.41 pence per euro, and 0.20% against the dollar, to $1.2732, after UK data showed that underlying price pressures remained strong.
“What matters now is the importance that the Monetary Policy Committee places on one-off and arguably retrospective data,” said Sanjay Raja, chief UK economist at Deutsche Bank Research, recalling that the figures for the survey were “more encouraging”.
Markets have priced the chance of a Bank of England rate cut in August at around 25%, up from 50% before the data, and 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 seven-month high against the euro at 0.9475, and was down 0.1% at 0.9503.
The single currency 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 the Swiss franc, 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”.
BofA expects the SNB to make a second 25 basis point cut next week and declare its willingness “to be active in the foreign exchange market if necessary.”
The Australian dollar rose 0.04% to 0.667 against the US currency, also helped by an upbeat message from Reserve Bank of Australia Governor Michele Bullock after the central bank’s rate decision on Tuesday.
The yen was little changed at 157.93 per dollar, as it continues to come under pressure from interest rate differences between Japan and the United States, in particular.
Analysts said monetary tightening by the Bank of Japan was on the horizon, but the BOJ would take a slow approach.
