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Fundamental Analysis

Currency Futures Fall as Dollar Rises on Safe-Haven Demand

  • There is a risk of a financial crisis in France.
  • The Federal Reserve projected just one rate cut this year.
  • BoJ governor Ueda said a July hike was possible but depended on data.

Currency futures fell as the dollar rose amid increased safe-haven demand due to political uncertainty in the Eurozone. However, some currencies, like the Canadian dollar, defied this trend due to upbeat domestic data.

It was a bearish week for the euro as investors dumped the currency after the announcement of a snap French election. French Finance Minister Bruno le Maire said there was a risk of a financial crisis in France because a far right or left win would increase government spending. This, in turn, could lead to a budget crisis that would hurt demand for government bonds. As a result, the euro plummeted while the US dollar rallied.

The dollar was also strong due to the Fed’s more hawkish-than-expected outlook at last week’s policy meeting. The central bank projected just one rate cut this year, which could come in December. This surprised markets, which had increased bets for a September cut after softer-than-expected consumer inflation data. 

Moreover, although policymakers were happy with the decline in inflation, most are waiting for more progress to gain confidence that it will continue to the central bank’s target. Notably, Fed’s Neel Kashkari said it was reasonable for the central bank to cut rates once in December. Notably, the dollar had little impact when the US released more downbeat economic data. 

US consumer sentiment (Source: University of Michigan)

US consumer sentiment (Source: University of Michigan)

Figures revealed that US consumer sentiment worsened in June due to inflation worries. The UoM preliminary consumer sentiment index was 65.6 in June, down from 69.1 in May. At the same time, US import prices unexpectedly declined in May, in line with the recent cooler inflation. 

Elsewhere, the Canadian dollar surged after data showed that factory sales in Canada rose by 1.1% in April. Additionally, wholesale trade increased by 2.4% in the same month. The European Central Bank and the Bank of Canada implemented their first rate cuts, weakening the euro and the Canadian dollar. However, major central banks might be less willing to cut rates since the Fed has remained cautious despite cooler inflation. 

Meanwhile, the yen fell after the Bank of Japan surprised markets with its plans to continue buying bonds at the current rates. Investors had expected a reduction and were, therefore, disappointed. At the same time, BoJ governor Ueda said that a July hike was possible but that it depended on data.