Euro takes advantage of weak dollar

With US and UK markets staying closed on Monday, the dollar extended its slide against most of its major peers, trading on the back foot today as well.

With no major economic data on today’s agenda, dollar traders will continue to pay close attention to what Fed officials have to say about monetary policy, as this is the last week they are allowed to do so before the blackout period.

Today, the microphone will be passed to Minneapolis President Kashkari, Governor Cook and San Francisco President Daly. Kashkari is an outspoken hawk, who has supported keeping interest rates untouched this year, as well as keeping the door open to resuming rate hikes. However, unlike Cook and Daly, he is not a voting member this year.

At her latest appearance, Daly said that it’s not clear whether inflation is safely receding and that there is no urgency to alter monetary policy. However, the last time Cook discussed interest rates was back in March. So, it will be interesting to see whether she is also in the “higher for longer” camp. If so, the dollar may gain some ground as investors further scale back their rate cut bets for this year.

The euro took advantage of the dollar’s weakness, despite dovish remarks by several ECB policymakers. The comment that stood out was made by Bank of France Governor Villeroy, who in response to members discussing a pause after an initial cut, said that they should keep their options open regarding the timing and pace of their future moves.

On Wednesday, Germany’s flash CPI numbers for May will be released, ahead of the Eurozone's data on Friday. According to the latest Eurozone PMIs, the pace of output price inflation softened in May and was the weakest since November 2023, which tilts the risks to the downside.

Therefore, lower inflation rates are likely to seal the deal for a June rate cut, and perhaps allow investors to add some more basis points worth of reductions after June, which could prove negative for the euro.

Wall Street stayed closed yesterday in observance of Memorial Day, but the futures market is pointing to a higher open today, something supported by the dollar’s weakness as well.

Although more hawkish remarks by Fed officials could result in another corrective retreat, the broader uptrend does not seem threatened, as following Nvidia’s stronger-than-expected earnings results, investors may stay willing to continue pricing future growth opportunities relating to artificial intelligence (AI).

In the energy market, oil has been in a recovery mode lately, perhaps driven by expectations of strong fuel demand due to the start of the summer driving and vacation season. Expectations that the OPEC+ group will keep in place its previously decided production cuts at Sunday’s meeting may also prove to be a helping hand.