Dollar Gains Continue as Euro Hit by Political Uncertainty

June 10, 2024
  • Last week’s strong U.S. data has once again upended Fed expectations; NY Fed’s May inflation expectations survey will be today’s data highlight; U.S. growth remains solid
  • The fallout from the European Parliament elections is weighing on the euro; French President Macron called snap legislative elections on June 30; ECB hawks continue to try and control the narrative; Norway reported mixed May CPI data; Sweden reported weak April GDP; Bank of Israel releases its minutes
  • Revised Japan Q1 growth was unchanged at -0.5% q/q; Japan also reported April current account data

The dollar continues to gain as an important week begins. Not only do we get the FOMC decision Wednesday, but May CPI data will be reported that morning. Both are expected to under the greenback. DXY is trading at the highest since May 14 near 105.34 and a break above 105.536 is needed to set up a test of the May 1 high near 106.490. The euro is leading this move lower in the foreign currencies due rising eurozone political uncertainty (see below). It is trading lower near $1.0735 and clean break below $1.0750 sets up a test of the May 1 low near $1.0650. Sterling is holding up better but is still trading back below $1.27. USD/JPY is edging higher to trade near 157. Data last week support our view that the backdrop of persistent inflation and robust growth in the U.S. remains largely in place. The Fed is widely expected to deliver a hawkish hold this week even as central banks elsewhere are cutting rates. Recent developments underscore the widening economic and monetary policy divergences that support the U.S. dollar and that should continue this week.


Last week’s strong U.S. data has once again upended Fed expectations. The Fed will get another piece of the puzzle ahead of its decision when May CPI data is reported Wednesday morning. As things stand, the odds of a September cut have fallen to around 55%, which nearly matches the cycle low from late May, while odds of a November cut have fallen to around 80%. In turn, this shift has helped underpin the dollar, especially as widening monetary policy divergences were underscored last week by BOC and ECB cuts. The resilient U.S. economy suggests the Fed will not be in any rush to loosen policy and we expect it to deliver a hawkish hold Wednesday.

The New York Fed’s May inflation expectations survey will be today’s data highlight. Expectations have been creeping higher, not just here but in other measures such as the University of Michigan’s consumer sentiment survey. This is yet another reason for the Fed to remain cautious and keep rates steady.

U.S. growth remains solid. Atlanta Fed's GDPNow model is now tracking Q2 growth at 3.1% SAAR, up from 2.6% previously. Next update comes June 18 after the data. NY Fed's Nowcast model is tracking Q2 growth at 1.9% SAAR vs. 1.8% previously. We also got its first estimate for Q3 at 2.0% SAAR. Both will be updated Friday.


The fallout from the European Parliament elections is weighing on the euro. As polls suggested, the nationalist/populist parties Identity and Democracy (ID) and the more moderate European Conservative and Reformists (ECR) made important gains and could play kingmakers in the new parliament. This could complicate or delay the progress towards deeper Eurozone integration. That said, it may take weeks before political alliances are shaped and a centrist “super grand coalition” remains the most likely scenario. The center-right European People’s Party (EPP) remains the biggest group in parliament, followed by the center-left Socialists and Democrats (S&D), and the centrist Renew Europe (RE).

French President Emmanuel Macron called snap legislative elections on June 30. A second round will be held on July 7. The move leaves us puzzled, as Macron’s rather hasty decision is quite a gamble after his party’s trouncing in the European Parliament elections. France’s hard right National Rally (NR) party came out on top, and the likelihood is that they will replicate this win in the French National Assembly in the upcoming legislative elections. If so, Macron would become a lame-duck president with three years left to his term. Heightened political risk in the eurozone’s second largest economy is likely hurting the euro more than the European Parliament elections, but neither outcome is desirable.

ECB hawks continue to try and wrest control of the narrative. Nagel said “Metaphorically speaking, I don’t see us on a mountain top from which we will inevitably come down. Rather, I see us on a ridge where we still have to find the right point for a further descent.” Holzmann speaks later today. As the lone dissent at last week’s meeting, his comments will inevitably be hawkish. However, markets currently see 80% odds of a September cut and similar odds for a December cut. The ECB’s policy outlook will remain a bigger driver for the euro than the eurozone’s unsettled political landscape. As such, ECB/Feb policy divergence can further weigh on EUR/USD.

Norway reported mixed May CPI data. Headline came in at 3.0% y/y vs. 3.3% expected and 3.6% in April, while underlying came in at 4.1% y/y vs. 3.9% expected and 4.4% in April. Headline was the lowest since July 2021 and driven in large part by lower electricity prices. However, sticky underlying inflation reinforces the Norges Bank’s guidance that a tight monetary policy stance may be needed for somewhat longer than previously envisaged. Next meeting is June 20, and no change is expected then. However, updated macro forecasts should give some clues as to when it may start easing.

Sweden reported weak April GDP. GDP came in at -0.7% m/m vs. -0.4% in March and was due to declining household consumption and private sector production. The outlook remains poor, with industrial orders falling -15.8% y/y vs. a revised -6.4% (was 1.0%) in March. Weak economic activity supports the Riksbank’s guidance that it will cut rates two more times during H2. May CPI data Friday will hold more clues to Riksbank policy. Bottom line: NOK/SEK has scope to edge higher on the diverging Norges Bank/Riksbank policy rate outlook.

Bank of Israel releases its minutes. At the May 27 meeting, the bank kept rates steady at 4.5% and warned that “there are several risks of a potential acceleration in inflation: geopolitical developments and their effects on economic activity, a depreciation of the shekel, continued supply constraints on activity in the construction and air travel industries, fiscal developments, and global oil prices.” May CPI will be reported Friday. Headline is expected at 3.2% y/y vs. 2.8% in April. If so, it would be the third straight month of acceleration to the highest since November and back above the 1-3% target range. Next meeting is July 8, and no change is expected then.


Revised Japan Q1 growth was unchanged at -0.5% q/q. Private demand was unchanged and still subtracted -0.4 ppt from growth, while fixed investment was neutral vs. -0.1 ppt in the preliminary data. Public demand was unchanged at 0.2 ppt, while net exports subtracted -0.4 ppt vs. -0.3 ppt in the preliminary data. Lastly, inventories added 0.3 ppt vs. 0.2 ppt preliminary. Data so far in Q2 have been solid, suggesting Japan can avoid two straight quarters of contraction.

Japan also reported April current account data. The adjusted surplus came in at JPY2.524 trln vs. JPY2.08 trln expected and JPY2.011 trln in March. However, the investment flows will be of more interest. The April data showed that Japan investors were net sellers of U.S. bonds (-JPY188.5 bln) for the first time since November. Japan investors stayed net sellers (-JPY259.5 bln) of Australian bonds for the fourth straight month and stayed net buyers of Canadian bonds (JPY15.5 mln) for the second straight month after eight straight months of net selling. Investors turned buyers of Italian bonds (JPY2 bln) after three straight months of selling. Overall, Japan investors turned total net sellers of foreign bonds (-JPY1.07 trln) for the first time after seven straight months of net buying. With Japan yields likely to move higher in 2024, it’s possible that Japan investors will keep chasing higher yields abroad, but we think it’s still too early to say.

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