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- US dollar continues to look strong.
- The Federal Reserve reiterated its "higher for longer" stance on interest rates.
- Meanwhile, several key central banks have made the call to cut their rates.
- The US dollar index, which tracks the greenback against a basket of currencies, rose to $105.83.
- That's 1.78% above its lowest point in May.
Euro slump continues
The EUR/USD exchange rate has been in freefall since interest rate policies diverged.
In their meetings this month, the Fed left interest rates unchanged between 5.25% and 5.50%, compared to 3.75% now in Europe.
Most officials expect a Fed rate cut in December. This conveniently avoids slashing rates before the November election. Such a cut could have sparked allegations of election meddling.
The ECB, on the other hand, has hinted at more cuts this year if the bloc’s inflation continues falling.
This increased interest rate spread has driven a fall in the EUR to USD exchange rate.
US rates stand at 5.50% while those in Europe have moved to 3.75%.
Additionally, the euro has retreated because of the political situation in France.
The market is worried about the potential victory by the right-wing Rassemblement National, which is leading in most polls. The first phase of the voting will happen on Sunday.
In most cases, currencies drop ahead of a major election, especially when there are risks of major changes.
GBP/USD falls after BoE decision
The GBP to USD exchange rate continued its downward trend after the Bank of England (BoE) delivered a dovish pause last Thursday.
In its meeting, the bank decided to leave rates unchanged at 5.25%. It then hinted that a rate cut will happen in the next meeting in August.
A report by the Office of National Statistics (ONS) fueled the optimism of a rate cut. In it, the agency said that the headline Consumer Price Index (CPI) dropped to 2.0% in May, hitting the BoE’s target for the first time since 2021.
The BoE is therefore expected to slash rates after the upcoming July 4th election.
That rate cut will help to stimulate the economy, which is expected to have the second-slowest growth rate in the G7 after Germany.
Altogether, the GBP/USD pair has fallen because of the stronger US dollar and the rising expectation that the BoE will cut earlier than the Fed.
USD/CHF rises after surprise SNB cut
The USD to Swiss franc pair surged to a two-week high after the divergence between the Fed and the Swiss National Bank (SNB) continued. In a surprise decision, the SNB slashed interest rates by another 0.25% to 1.25%.
As a result, the difference between the US and Swiss rates has widened to 4.25%, creating another great carry trade opportunity. This carry trade has benefited the US dollar at the expense of the franc.
The SNB slashed rates for two main reasons. First, its goal is to stimulate the Swiss economy, which has been recovering at a slow pace in the past few quarters.
In a note, analysts at ING said:
"With decent Swiss GDP growth in the first quarter there was no real urgency for the SNB to cut rates, but given the still benign inflation outlook the SNB saw a window to ease. For the SNB it was more a rate cut because it could, not because it should."
Second, it aimed to lower the Swiss franc value, which it believes is highly overvalued. As a big exporter, Switzerland favours a weaker currency that makes its products a bit cheaper than from competing countries.
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