- US data in the last week has shown that the economy remains resilient.
- There was an improvement in US core durable goods orders in April.
- Tokyo’s core inflation eased, as expected, to 2.2% in April.
Currency futures rose on Friday as the dollar pulled back from its recent highs amid profit-taking. However, the outlook for the greenback remains bullish, given the better-than-expected economic reports from the US.
US data in the last week has shown that the economy remains resilient despite high interest rates. Consequently, traders have dialed down expectations for a Fed rate cut in September. Therefore, analysts believe there is more upside potential for the dollar.
Notably, data on Friday showed a better-than-expected improvement in US core durable goods orders in April. This improvement indicates high demand in the economy, meaning consumer spending is strong. As long as consumer spending remains high, there will be pressure on prices, which will cause hesitation among policymakers in cutting interest rates.
In the previous session, investors had absorbed figures showing an acceleration in US business activity in May. Moreover, the report showed a jump in input prices that could translate to higher goods prices in the future.
Markets have fluctuated, given the ups and downs in US economic indicators. Labor market and consumer inflation numbers had raised expectations that the Fed would cut rates at least twice in 2024. However, that has changed a bit after more recent data.
US core inflation estimates (Bureau of Economic Analysis, Bloomberg)
Investors will now await the core PCE price index for more clues on when the Fed might cut interest rates. Economists predict the smallest gain in inflation this year.
As Fed rate cut expectations drop, those of other major central banks also drop. Policymakers around the globe will do everything to avoid a big divergence in policy with the Fed, which would weaken their currencies.
Notably, expectations for a Bank of England rate cut in June fell to 10% by the end of the week. Although the drop came after UK inflation missed forecasts, analysts believe the reaction was exaggerated. Some of it might have been due to the decline in rate-cut expectations in the US. As a result, the pound strengthened despite data showing a massive decrease in sales.
Meanwhile, the yen strengthened after warnings from Japan’s top currency diplomat against sharp declines in the currency. It is clear that Japan might intervene again to support its weak currency. Meanwhile, data showed that Tokyo’s core inflation eased as expected to 2.2% in April.
