- US wholesale inflation increased by 0.2% in June compared to forecasts of a 0.1% increase.
- The US reported the first decline in price pressures in 4 years.
- The yen rallied on Thursday and Friday after a BoJ intervention.
Currency futures rose on Friday on dollar weakness as soft consumer inflation figures overshadowed an increase in wholesale inflation. Investors focused on the higher likelihood of a Fed rate cut in September.
US producer prices (Source: US Bureau of Labor Statistics)
On Friday, the US Producer Price Index report revealed that inflation increased by 0.2% in June compared to forecasts of a 0.1% increase. The annual figure also rose. However, experts say this figure is more volatile than the CPI number. Therefore, despite the increase, investors continued betting on a Fed rate cut in September.
In the previous session, consumer inflation data came in softer than expected. The US reported the first decline in price pressures in 4 years, leading to a sharp increase in rate cut expectations. The CPI fell by 0.1%, compared to expectations of a 0.1% increase. At the same time, the annual number increased by 3.0% below the forecast of a 3.1% increase. The figures confirmed the recent data showing a downtrend in the economy and inflation.
Notably, before the report, Powell had refused to take on a more dovish stance. He said policymakers still needed more evidence that inflation was trending lower and would continue to the central bank’s target.
Therefore, when Thursday’s figures confirmed a downtrend, markets priced in a 94% likelihood of a cut in September. Such an outlook was quite bearish for the dollar and allowed other major currencies to rally. At over 90%, investors are nearly certain the Fed will cut rates. However, policymaker remarks from now could change this figure.
Market participants are eagerly awaiting a speech from Powell on Monday. If he remains cautious, rate cut bets might fall. However, if he sounds more dovish than he was the last time, there will be more confidence in the current outlook. Consequently, the dollar might continue falling.
Meanwhile, the yen rallied on Thursday and Friday after the Bank of Japan intervened to support the currency. A weak dollar gave an additional boost to the currency. The pound also had a solid rally due to economic optimism after an upbeat GDP report on Thursday. In May, the UK economy grew at a quicker rate than forecasted. As a result, Bank of England rate cut expectations fell.
