Dollar little moved after Biden drops out of the presidential race

Important calendar events

• EUR: Consumer Confidence
• USD: Existing Home Sales, Richmond Manufacturing Index

USD

The dollar gained strength on Monday and the dollar index rose above 104.3. US treasury yields surged providing support for the dollar, with the US 10-year bond yielding approximately 4.27%. 

The dollar was little moved after US President Joe Biden announced on Sunday his decision to end his re-election campaign. The dollar fell sharply at Monday’s opening but recovered later in the day. Biden endorsed the candidacy of Vice President Kamala Harris for the Democrats. Republican former President Donald Trump, however, remains ahead at polls for winning the US elections in November.

One of the key factors that are driving the dollar right now is the US rate outlook. The US Federal Reserve kept interest rates unchanged at its policy meeting in June, within a target range of 5.25% to 5.50%, as expected. The US Federal Reserve has held interest rates steady since last July. 

US inflation has dropped to its lowest level in three years, raising the odds of a rate cut in September. Headline inflation cooled to 3.0% year-on-year in June from 3.3% in May against expectations of 3.1%. Monthly inflation shrank by 0.1% in June against the 0.1% growth expected. Core inflation, which excludes food and energy, rose by just 0.1% in June from 0.2% in May dropping below expectations of 0.1% growth. Signs that inflationary pressures are easing might induce the Fed to start cutting interest rates in September.

Rate cut expectations in September are currently above 90%, putting pressure on the dollar. The uncertainty around Fed rate expectations is likely to continue in the coming months causing volatility in Forex markets.

Final GDP data showed that the US economy expanded by just 1.4% in the first quarter of the year. Economic growth in the US is slowing down, falling considerably below the 3.4% expansion registered in Q4 of 2023. The US economy is expanding at an increasingly slower pace putting pressure on the dollar, as GDP data have shown expansion by 4.9% in the third quarter of 2023. 

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EUR 

EUR/USD traded sideways on Monday, oscillating around the 1.088 level. If the EUR/USD pair declines, it may find support at 1.087, while resistance may be encountered near 1.095.

The ECB kept interest rates steady at its monetary policy meeting last week, after lowering its Main Refinancing Rate by 25 basis points to 4.25% in June. ECB President Christine Lagarde has stated that the central bank’s policy will remain data-driven. Markets expect that the ECB will cut interest rates again in September. The central bank’s policy outlook, however, will likely depend on the progress of disinflation in the EU over the coming months. Eurozone inflation remains sticky and may slow down the pace of future rate cuts.

Eurozone inflation eased to 2.5% in June from 2.6% in May putting pressure on the Euro. Core CPI, which excludes food and energy, however, rose by 2.9% on an annual basis in June against expectations of a 2.8% print. 

The Eurozone economy expanded by 0.3% in the first quarter of the year, which was in line with preliminary estimates. GDP data for Q4 of 2023 showed that the Euro area economy was stagnant with a GDP print of zero. The EU economy contracted by 0.1% in the third quarter of 2023 and barely expanded in the second quarter by 0.1%, after contracting by 0.1% in Q1.

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GBP 

GBP/USD traded sideways on Monday, moving near the 1.292 level. If the GBP/USD rate goes up, it may encounter resistance near 1.304, while support may be found near 1.290. 

The BOE kept interest rates steady at its latest monetary policy meeting in June. The BOE maintained its official rate at a 16-year high of 5.25. Markets are pricing in a BOE rate cut in September with approximately 80% probability, while a rate cut by November is fully priced in. 

The British economy is showing signs of improvement, reducing the odds of a dovish pivot by the BOE. GDP data showed that the British economy expanded by 0.4% in May following stagnation the month before and against expectations of 0.2% growth. Moreover, the British economy expanded by 0.7% in the first quarter of the year against initial estimates of 0.6% growth. The UK slipped into recession last year as the economy contracted by 0.3% in the final quarter of 2023. 

Price pressures in the UK are easing, raising the odds of a BOE rate cut by September. British headline inflation remained steady at 2.0% year-on-year in June, beating slightly expectations of a drop to 1.9%. Annual Core CPI, which excludes food and energy, also remained steady at 3.5% in June. British inflation has consistently been down to the BOE’s target 2% target since May, indicating that the BOE’s hawkish monetary policy has been paying off. 

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JPY

USD/JPY dipped on Monday, dropping below the 156.5 level. If the USD/JPY pair declines, it may find support near 155.3. If the pair climbs, it may find resistance near 158.8.

The Yen surged last week, raising intervention speculation. The USD/JPY had been trading close to a 38-year high when the Yen received a sudden boost, fueling reports that the Japanese government has once again intervened to support the currency. So far Japanese officials have not commented on those rumors, but many analysts believe that the sudden reprieve in the Yen’s downfall was engineered by the BOJ. 

BOJ officials have been attempting to boost the Yen, warning traders against speculative short selling of the currency. The BOJ intervened to support the Yen in 2022 and again this year in late April and early May, when USD/JPY surged above the 160.0 level. 

The Yen has been under pressure since the BOJ disappointed expectations of a hawkish shift at its latest meeting. The BOJ pivoted to a more hawkish policy at its meeting in March, ending its negative interest rate policy and raising the benchmark interest rate into the 0% - 0.1% range. The Yen continues to weaken as there is still a significant disparity between interest rates offered by the BOJ and those from other major central banks. BOJ Governor Kazuo Ueda has hinted that the central bank would ease its bond purchasing at the next meeting in July.  

On the data front, inflation in Japan remains weak but rising. Headline inflation rose to 2.5% year-on-year in May from 2.2% in April. BOJ Core CPI rose to 2.1% on an annual basis in May from 1.8% in April, exceeding expectations of 1.9%. Rising inflation in Japan increases the odds of another BOJ rate hike later in the year. Tokyo Core CPI rose to 2.1% year-on-year in June from 1.9% in May against estimates of a 2.0% reading. 

Preliminary GDP data for Q1 of 2024 for Japan showed that the country has slipped into recession. Japan’s economy shrank by 0.5% in the first quarter of the year against expectations of a 0.3% drop. Japan’s economy registered a small expansion by 0.1% in the final quarter of 2023, showing that the country’s economy is shrinking. Recession concerns limit the odds of a BOJ hawkish pivot in the coming months.

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Written by:
Myrsini Giannouli

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