- Data from the US on Friday revealed a surge in business activity to an over two-year high.
- The Fed stood out as less dovish than other major central banks.
- The pound recovered slightly on Friday after retail sales data came in higher than expected.
Currency futures fell on Friday as the dollar rose due to better-than-expected business activity data. At the same time, the Fed stood out as less dovish compared to other major central banks, boosting the greenback.
US business activity (Source: S&P Global)
Data from the US on Friday revealed a surge in business activity to an over two-year high. S&P Global reported that the composite PMI increased from 54.5 in May to 54.6 in June. This is a sign of continued expansion in the manufacturing and services sectors.
However, the survey also showed lower inflation in May, supporting recent data showing easing price pressures. The recent decline in inflation has raised bets in the market that the Fed will cut rates in September. However, the central bank has projected only one cut in December.
If data continues showing slower price increases, policymakers might gain enough confidence to cut rates twice this year. Therefore, market participants will now focus on the PCE price index on Friday for more clues on the timing for rate cuts.
Additionally, the dollar got support when the Fed stood out as less dovish than other major central banks. This happened after the Swiss National Bank implemented its second rate cut, and the Bank of England moved closer to its first rate cut.
Moreover, other central banks like the European Central Bank and the Bank of Canada have started their rate-cutting cycles. This shines a light on the Fed, which remains cautious amid a slower decline in inflation in the US. The dollar will likely remain strong if the Fed keeps delaying its first rate cut.
At the same time, experts believe the dollar rally will continue with political uncertainty in the Eurozone. As long as investors dump the euro, the dollar will benefit, putting pressure on currency futures.
The yen fell sharply, returning to levels that led to interventions in April and May. Consequently, Japanese authorities cautioned against further declines, while investors feared a possible intervention. Meanwhile, the pound recovered slightly on Friday after retail sales data came in higher than expected. However, the outlook for the currency remained bleak as the Bank of Egland got closer to its first rate cut.
