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Yen on guard ahead of BOJ; euro stutters with weekly loss in sight By Reuters – Investing.com

By Ray Wee

SINGAPORE (Reuters) – The yen was on the defensive on Friday ahead of a Bank of Japan policy decision that could see it further tapering its massive monetary easing, while the politically fraught euro is set to slip for the week.

The dollar turned higher, supported by a rise against the euro and safe-haven buying, as France’s early general elections stoked concerns about political uncertainty in the country and across the euro zone.

The yen weakened slightly to 157.08 yen per dollar, is expected to be down about 0.2 percent for the week, but movements were largely subdued ahead of the end of the Bank of Japan’s two-day monetary policy meeting late on Friday.

The central bank is expected to keep interest rates ultra-low but could announce a tapering of its large-scale bond purchases in a slow-but-steady move away from quantitative easing.

“Our baseline view is they’ll announce a rate cut,” said Ray Attrill, head of currency strategy at National Australia Bank (OTC:).

“The risks are probably a little bit asymmetric. If no changes are announced, we would expect a weakening of the yen, but assuming changes are announced, the scope for yen appreciation is probably quite limited.”

Across markets, major currencies struggled against a slightly stronger US dollar on Friday, with the pound down 0.08% to $1.2752. It is on track to finish the week up 0.3%.

The New Zealand dollar was down 0.18% to $0.6625, while the New Zealand dollar was down 0.26% to $0.6152.

But the two southern hemisphere currencies are expected to rise 0.8% and 1% respectively this week on expectations that interest rates may remain high for a long time and on a flurry of U.S. economic data released this week that has rekindled the possibility of an early interest rate cut by the Federal Reserve.

Data on Thursday showed that initial claims for jobless benefits hit a 10-month high last week, while separate data showed producer prices unexpectedly fell in May, strengthening expectations that the Fed will begin an easing cycle in September.

The figure follows Wednesday’s U.S. inflation reading that showed consumer prices unexpectedly remained flat in May.

At the end of this week’s monetary policy meeting, the Fed struck a more hawkish tone than expected, predicting just one rate cut in 2024, but Wall Street surged to record highs and Treasury yields fell as investors chose to focus on weaker-than-expected data.

“The Fed has changed its mind multiple times about its expected policy path, so we don’t place much weight on the new outlook, and Chairman Powell himself said he is ‘not maintaining the outlook with a high degree of confidence,’ underscoring the Fed’s data-dependent approach,” said Jean Boivin, president of the BlackRock (NYSE:) Investment Research Institute.

“Whatever the Fed’s forward-looking statements, future inflation expectations, in either direction, are likely to continue to lead to significant revisions to the policy outlook.”

Political Unrest

The euro was little changed at $1.0737 and is expected to be down about 0.6% for the week.

The eurozone has had a tumultuous week after French President Emmanuel Macron’s decision to hold an early vote in his country spooked investors.

Macron had called for early parliamentary elections on Sunday after France’s far-right handed his party a crushing defeat in EU elections.

The euro is languishing near its lowest level in 22 months against the British pound and is expected to fall 0.9% for the week.

Similarly, the euro was trading near its lowest level in more than five months against the Australian dollar and near its lowest level in six months against the US dollar.

“Macron’s announcement was a surprise and it’s possible that fresh elections could work in his favour, but this scenario is highly unlikely. His political standing would likely weaken, but not enough to prevent him from forming a new government,” said Eric Jan van Haan, senior macro strategist at Rabobank.

“Macron’s party suffered a major setback in the European elections and an unfavourable outcome in the next elections could further exacerbate concerns about the sustainability of the country’s debt.”