Dollar rallies on NFP, euro slips after EU vote

The US dollar rallied against all its major counterparts on Friday and continued marching north against most of them on Monday, as Friday’s US employment report revealed that the world’s largest economy added a lot more jobs than expected in May.

Although the unemployment rate ticked up to 4.0%, the stellar employment gains and the acceleration in wage growth encouraged investors to scale back their Fed rate cut bets. The probability for a first 25bps reduction in September dropped to around 50% from 70% ahead of the data, while the total number of bps worth of reductions by the end of the year was reduced to 36 from around 50.

Now, dollar traders are likely biting their nails in anticipation of Wednesday’s CPI numbers and the FOMC decision. The Committee is expected to stand pat, but investors will be eagerly awaiting the updated economic projections and the dot plot.

Thus, a set of CPI data pointing to inflation stickiness, combined with an upward revision to the Fed’s interest rate projections, may allow the dollar to extend its latest recovery.

Flying to Europe, the common currency opened the week with a negative gap as gains in right-wing support in the European Parliamentary election prompted French President Macron to call a snap national election, worsening the headache regarding Europe’s political scene.

Although socialist, liberal and center parties are set to retain a majority in the European Parliament, the surge in Eurosceptic nationalists is likely to make it more difficult for lawmakers to agree and push through reforms and policies that give the Union more power.

Combined with the prospect of a far-right victory in France, this could keep the euro pressured for a while longer. Taking also into account the dollar’s strength, euro/dollar could break below the key zone of 1.0720 soon.

On Wall Street, all three of its main indices closed in the red, but the losses were not as massive as implied by the scale of the dollar's gains. What’s more, the retreat was preceded by a new record high in the S&P 500.

The fact that market participants are now expecting less rate cuts by the Fed this year weighed on stocks, but stock investors may have remained relatively content with the idea that the next move is still going to be a reduction.

Also, it seems that there are many participants still willing to price in future growth opportunities related to artificial intelligence. This probably keeps the broader picture of the stock market positive.

Gold tumbled after the stronger-than-expected jobs data, and it is now trading near a key support zone at around $2,280. A break below that zone could signal the completion of a head and shoulders formation and may allow a larger bearish correction.