Daily Analysis Provided by zForex - 07.01.2024
Market Review: Euro Gains Pressure Dollar Amid French Election Results and US Inflation Data
The offshore Chinese yuan fell below 7.30 per dollar, nearing its lowest point in over seven months, amid mixed reactions to recent Chinese PMI data. While a private survey indicated strong growth in the manufacturing sector in June, hitting a three-year high and surpassing forecasts, suggesting positive momentum in industrial activity, official figures released over the weekend painted a less optimistic picture. These figures revealed ongoing contraction in manufacturing for the second straight month, highlighting the necessity for further stimulus measures as China aims to stabilize its economy.
The Japanese yen traded at 161 per dollar, closely approaching a 38-year low of 161.28 reached last week following a downward revision in Japan’s first-quarter GDP, which continued to weigh on the currency. The revised data showed that Japan's economy contracted at an annualized rate of 2.9% in the January-March period, a steeper decline from the previously reported 1.8%, largely due to weaker public works spending. Despite this, confidence among large Japanese manufacturing firms rose to a two-year high in Q2, reflecting an improved economic outlook. Last week, the yen fell to its lowest levels in decades after Atsushi Mimura was appointed as Japan’s top currency diplomat by the Ministry of Finance, amid increasing pressures to bolster the currency. The yen depreciated by 2.3% against the dollar in June, extending its year-to-date decline to approximately 14%, as the Bank of Japan pursued a more cautious approach in its monetary policy normalization efforts compared to market expectations.
On Monday, the dollar index edged down towards 105.6, marking its third consecutive decline, primarily due to the euro's strength following the initial round of France's snap election held over the weekend. Marine Le Pen's National Rally secured victory in the first round of the parliamentary election as widely predicted, although their lead was narrower than expected. The dollar had already come under pressure on Friday after US PCE inflation figures for May showed a slowdown, reinforcing expectations of interest rate cuts by the Federal Reserve later this year. Currently, markets are pricing in a 63% probability of a Fed rate cut in September, with increased chances also seen for moves in November and December. Investors are now awaiting US manufacturing activity data later in the day for further economic insights and potential impacts on monetary policy. Among major currencies, the dollar showed its largest weakness against the euro, the British pound, and currencies from Australia and New Zealand.
On Monday, gold maintained its position around $2,325 per ounce as investors continued to evaluate recent US inflation figures. Last Friday, the Federal Reserve's preferred measure of core inflation slowed to its lowest annual rate since 2021, sparking optimism that price increases may align with target levels and bolstering expectations for two interest rate cuts by the central bank this year. Additionally, prospects of rate cuts in other major economies, including anticipated moves by the Bank of England following the UK's election and further easing by the People's Bank of China to support economic recovery, provided further support to bullion prices. Investors are now closely monitoring upcoming US payrolls data and the release of FOMC meeting minutes this week to gain insights into the timing of potential Fed rate adjustments. Meanwhile, in India, the second-largest consumer of gold, demand for physical gold remained subdued last week amid elevated prices.
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