Dollar Surges on Trump Speculation, Euro and Pound Navigate Political Waters.

USD: Dollar Rides High on Trump’s Prospects

With some gains seen in the euro and Norwegian krone after the French election relief, the dollar has kicked off the week strongly. This marks the second dollar appreciation in five days, driven by higher perceived odds of Donald Trump winning the US presidency. Yesterday, the US Supreme Court granted Trump some immunity regarding his efforts to reverse the 2020 election results, reducing the likelihood of a trial before the November vote. This legal development has reinforced the market’s association between a stronger dollar and Trump’s potential presidency. Investors anticipate lower taxes, inflationary protectionist measures, and heightened geopolitical risks under Trump. On the Democratic side, President Joe Biden faces pressure to step down from the race. Market skepticism about Biden’s chances against Trump suggests that his withdrawal, especially if replaced by California Governor Gavin Newsom, could negatively impact the dollar.

On the macroeconomic front, the US June ISM manufacturing index softened to 48.5, indicating continued contraction, with key components like production, new orders, and employment remaining below 50. Inflation pressures eased as the prices paid component dropped to 52.1. Construction spending fell unexpectedly, highlighting reliance on consumer activity for growth. Today’s JOLTS job openings for May could influence the market significantly, with expectations for a decline to 7950k from last month’s 8059k. Another major event is Federal Reserve Chair Jerome Powell’s participation in a panel with ECB President Christine Lagarde (3:30m CET). Powell’s optimism on disinflation poses downside risks for the dollar. The USD/JPY pair remains a focal point for investors due to the high risk of FX intervention, with Japanese authorities possibly drawing a new line close to 165.

EUR: Euro’s Rally Fizzles Amid Election Jitters

The euro’s relief rally following French election results lost momentum yesterday. We doubt there will be significant support for the common currency given the uncertainties ahead of the second round on Sunday, July 7. Support for other European currencies was mixed, with markets favoring the higher-yielding NOK and GBP over the lower-yielding SEK and CHF. Our core call for this summer is a strengthening NOK/SEK due to policy divergence, as outlined in our latest Scandinavian FX update. Another factor limiting euro support is that regional CPI estimates have met expectations, indicating declining inflation in the eurozone for June. Today’s eurozone-wide prints are expected at 2.5% for headline and 2.8% for core inflation, likely insufficient to trigger a major repricing in rate expectations but may soften the ECB’s hawkish stance.

Lagarde’s remarks today in the panel with Powell follow her opening statement yesterday that the ECB needs more time to assess inflation uncertainty. Despite downside risks for the dollar, the euro seems worse off compared to high-beta currencies like NOK, AUD, and NZD. We foresee a potential USD-driven move to 1.0800 in EUR/USD in the next few days, but gains will likely be capped by French political risk.

GBP: Pound Steady Amid Manufacturing Strength and Political Stability

The Pound (GBP) held firm against most peers on Monday, supported by the UK’s finalised manufacturing index for June. Although revised lower from 51.2 to 50.9, it remained in expansion territory, indicating sustained growth in the UK manufacturing sector. Rob Dobson of S&P Global Market Intelligence noted the sector’s strongest growth spell in over two years, driven by domestic market performance despite weak export performance.

However, this was not enough to boost Sterling as GBP investors were cautious ahead of the UK’s general election on Thursday. MUFG Bank highlighted the UK’s favorable political outlook and strengthening economy, which are likely to limit Bank of England’s interest rate cuts in 2024. These factors have led MUFG to upgrade its GBP forecasts against the Euro and Dollar. Since 2016, the UK has not been synonymous with political stability, which has hurt the Pound. But this could change with a potential Labour Party victory in the upcoming election. MUFG’s Derek Halpenny expects Labour to win a large majority, contributing to political stability and stronger economic growth. Despite recent dips in Labour’s poll numbers, Keir Starmer is still likely to become the next Prime Minister, with falling Labour support benefiting Reform UK and the Liberal Democrats instead of the Conservatives. Households and businesses now look to Labour to devise a plan for the struggling economy.