Sterling hits 22-month high versus euro edges up vs dollar

British Pound

Reuters: Sterling hit a 22-month high versus the euro after a sharp rise the day before and was roughly unchanged against the dollar on Tuesday as investors await U.S. inflation data and the outcome of the Federal Reserve's policy meeting. The single currency dropped on Monday after the gains of eurosceptics in the elections for the European Parliament and France called an election. With a potential right-wing victory in France, the political landscape could pose significant challenges to the European Union's efforts to deepen integration, weakening the euro.

Britain's labour market showed more signs of cooling in April with a rise in the unemployment rate but failed to trigger a significant price action of the British currency. The dollar hovered near a one-month peak against the euro as traders braced for U.S. data and the Fed rates forecasts. Sterling rose 0.25% to 84.33 pence per euro , its highest since August 2022. It was up 0.05% at $1.2738. Derek Halpenny, head of research, global markets at MUFG, flagged that the euro has broken below important technical support at the 0.8500 level, which has been tested and held over the past year.

He expects the single currency to rise back up into the 0.8500-0.8600 trading range if Marine Le Pen's National Rally, NR, fails to become the largest party in France and to fall towards the lows in early 2022 at closer to the 0.8300 if the RN party becomes the largest party but falling short of being able to form a majority in parliament. The NR was forecast on Monday to win a snap election in France but fell short of an absolute majority.

"Sterling largely held its own off the back of the data, as while rapidly rising wages could delay the start to Bank of England interest rate cuts, the increase in joblessness bodes ill for the UK's growth outlook," said Matthew Ryan, head of market strategy at global financial services firm Ebury. Money markets discounted a 40% chance of a 25 basis points BoE rate cut in August while more than fully pricing the same move in November.

US Dollar

Reuters: The dollar hit a four-week high on Tuesday, ahead of a highly anticipated inflation report that is likely to influence the timing of the first rate cut by the U.S. Federal Reserve, while the euro was pressured by political uncertainty in the European Union. Stronger-than-expected jobs gains and higher wage inflation in Friday's U.S. jobs report for May raised concerns that inflation may remain sticky while growth stays strong, making the U.S. central bank less likely to cut rates in the coming months. Traders have pared back expectations of the first U.S. rate cut in September, which now has roughly 50-50 odds.

The U.S. Labor Department is due to release its consumer price index for May at 8:30 a.m. EDT on Wednesday, just hours before the Fed concludes its latest two-day policy meeting. "I do think the Fed members will take that, CPI data, into consideration," said Noel Dixon, senior macro strategist at State Street Global Markets. The U.S. central bank is expected to leave interest rates unchanged, but Fed policymakers will update economic projections widely known as the "dot plot." If inflation remains in line with expectations, Dixon expects the dots to show an expectation of two 25-basis-point rate cuts this year, down from the median projection of three cuts as of March.

"You could get some short-term weakness in the dollar, especially given the big move we've had in euro/dollar," Dixon said. However, "once the dust settles, I think we'll get back to the relative monetary policy divergence story and that'll continue to be supportive for the dollar going into the rest of the year." Economists polled by Reuters expect headline consumer price inflation to ease to 0.1% from 0.3% last month, and core price pressures to remain steady at 0.3% from last month. The dollar index was last up 0.1% at 105.24 but rose as high as 105.46, its strongest level since May 14. The euro fell 0.2% to $1.0742 and earlier reached $1.07195, its lowest level since May 2.

The single currency has also fallen on concerns that gains by eurosceptics in European elections and the calling of a snap French election could complicate the EU's attempts to deepen integration. Marine Le Pen's National Rally was forecast on Monday to win the coming French election but fall short of an absolute majority. Meanwhile, the Bank of Japan will conclude its two-day meeting on Friday, which economists expect to result in the central bank starting to taper its monthly bond purchases.

The dollar was little changed on the day against the Japanese currency at 157.03 yen. The yen's plunge to a 34-year low of 160.245 per dollar at the end of April sparked several rounds of official Japanese intervention to the tune of 9.79 trillion yen. In cryptocurrencies, bitcoin fell 3.53% to $67,200.27.

South African Rand

Reuters: The South African rand gained on Tuesday, as political parties continued talks to try and form a government of national unity in the country, days away from the first sitting of lawmakers. At 1550 GMT, the rand traded at 18.6450 against the dollar, 0.44% stronger than its previous close. The African National Congress last week said it would look to form a government of national unity after it lost its parliamentary majority in an election in May, the first time since it came to power at the end of apartheid 30 years ago.

Potential partners include the pro-business Democratic Alliance and the leftist Economic Freedom Fighters. "The ongoing talks will remain at the front of investors' minds ahead of Friday when the National Assembly will hold its first sitting," said Rand Merchant Bank analysts in a research note. New lawmakers will be sworn-in, and the speaker, deputy speaker and next president will be elected. On the stock market, the Top-40 index closed down 0.2%. South Africa's benchmark 2030 government bond was stronger, with the yield down 9.5 basis points to 10.28%.

Global Markets

Reuters: Asian shares were subdued on Wednesday after data showed China's consumer prices still remained soft, while the dollar held firm ahead of a key U.S. inflation report and Federal Reserve policy decision that would set the near-term course for interest rates. MSCI's broadest index of Asia-Pacific shares outside Japan was off 0.1%, while Japan's Nikkei slid 0.8%. Technology shares in the region, however, outperformed, with MSCI Asia-Pacific ex-Japan IT index up 1%. Data showed that China's consumer price index fell 0.1% in May from a month earlier, missing forecasts. On an annual basis, they rose 0.3%.

China's blue chips were last down 0.1%, while Hong Kong's Hang Seng index extended earlier losses to fall 1.2%, also weighed by a 27% plunge in China Evergrande New Energy Vehicle Group, after the unit of developer China Evergrande warned of losing assets. Overnight on Wall Street, Apple surged 7% to a record high a day after it unveiled new AI features meant to rekindle demand for iPhones. That helped Nasdaq Composite rise 0.9% and the S&P 500 gain 0.3% to record closing highs. This also lifted tech-heavy Taiwan and South Korean shares, gaining 0.7% and 0.3%, respectively.

Elsewhere, caution reigned as focus turns to the U.S. CPI data later in the day, which is forecast to rise a slim 0.1% in May from a month earlier, but with the core up 0.3%. S&P 500 futures and Nasdaq futures both were flat in Asian trading. "The countdown is on, with the market going into full risk management mode," said Chris Weston, head of research at Pepperstone. "There aren't a whole lot of reasons to jump in and support the opening weakness either, so we could easily see further selling on open."

"I like to use US core CPI m/m as my simple playbook guide, so any number that rounds to 0.2% m/m could offer relief in risk markets and bring out USD sellers, while a number that rounds to 0.4% could see US two-year yields rise and with it the USD comes in hot." In the currency markets, the dollar index has maintained all of its post-payrolls gains since Friday, looming large at 105.31 against its major peers. The euro was nursing heavy losses at $1.0734, down for a fourth straight session, amid political turmoil brought about by far right gains in European elections and the snap election in France.

Hours after the release of the U.S. CPI data, the Fed is considered certain to hold steady at its policy meeting, but the focus is on whether it keeps three rate cuts in its "dot plot" projections for this year. Futures imply 39 basis points of Fed easing for this year, equivalent to just one and a half cuts. Treasury yields, which fell overnight on the robust result of a 10-year Treasury auction, steadied. The 10-year yield held at 4.4099%, after falling 7 bps the previous session.

"Treasuries will react to the dot plot and possible dovish lean from Powell with a modest bull steepening. However, continued range trading is likely given ongoing "data dependent" outlook," said analysts at TD Securities. Oil prices extended gains for a third straight session. Brent futures rose 0.2% to $83.11 a barrel. U.S. crude futures gained 0.4 to $78.19 a barrel. Gold prices edged 0.2% lower to $2,311.80 per ounce.

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