Euro weakens after Macron calls snap French election

The euro fell on Monday, hit by political uncertainty after gains by the far right in voting for the European Parliament on Sunday prompted a bruised French President Emmanuel Macron to call a snap national election.

The uncertainty in France adds one more element to what will be a busy week for markets with crucial U.S. inflation data due on Wednesday, the same day as a Federal Reserve policy meeting wraps up, followed by a Bank of Japan meeting to round off the week.

The euro dropped 0.4% against the dollar to $1.076, its lowest since May 9.

“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,” said Lee Hardman, senior currency analyst at MUFG.

“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.”

The Federal Reserve will conclude its two-day policy meeting on Wednesday. Data on Friday showed non-farm payrolls increased by 272,000 jobs in May, well above expectations in a Reuters poll for 185,000.

Markets are now pricing in 36 basis points (bps) of Fed rate cuts this year compared to nearly 50 bps – i.e. two 25 bp cuts – before the jobs data.

U.S. consumer inflation data will be another factor in the Fed’s decision making. While no policy shift is expected at the meeting, the Fed will issue the latest batch of ‘dot plots’ — policymakers’ projections of the path of interest rates.

At the last such release in March, the median projection was for three 25-bp rate cuts this year. Investors will be watching to see by how much that is revised down.

The paring back of expectations for rate cuts has been supporting the dollar for much of 2024, with the Japanese yen particularly suffering.

The dollar was last up 0.2% on the Japanese currency at 157 yen, having jumped 0.7% on Friday after the payrolls release. With sterling flat at $1.273, the dollar index — which tracks the greenback against six main peers — was up 0.3% at 105.14 and trading at a one-month high.

Japan will also be in focus this week, as the Bank of Japan is due to hold its two-day monetary policy meeting on Thursday and Friday, with the central bank widely expected to keep short-term interest rates in a 0-0.1% range.

Reuters reported last week that BOJ policymakers are brainstorming ways to slow its bond buying and may offer fresh guidance.

Speculation is building in the market that the BOJ may tweak its bond buying arrangements and, if the central bank fails to meet these bets, the yen could come under further pressure.

“Without any hawkish surprise, JPY may be sold initially following the policy announcement, similar to what we have seen after the past meetings,” analysts at Nomura said in a note.

“Moreover, in the case of dovish surprises, for example, if the BOJ avoids decreasing its [Japanese government bond] purchases or decreases its JGB purchases only very slightly, there is a risk that USD/JPY could overshoot to possible intervention territory again, like we saw in April.”

Japanese officials spent around 9.8 trillion yen ($62.4 billion) on currency intervention to support the currency in April and May.