- The US core PCE revealed a drop in inflation from 0.5% to 0.3%.
- The likelihood of a Fed rate cut in June increased from 57% to 68.5%.
- Canada’s gross domestic product rebounded in January.
Currency futures edged higher on Friday as the dollar pulled back after inflation fell. However, volatility was low as US markets were closed for the Good Friday holiday. Still, the US released its core PCE price index report, which revealed a drop in inflation from 0.5% to 0.3%. At the same time, consumer spending increased, showing resilience in the economy.
US underlying inflation (Source: Bureau of Economic Analysis)
The dollar fell slightly, as the drop was in line with expectations. Moreover, the likelihood of a Fed rate cut in June increased from 57% to 68.5%. The figures were a welcome surprise for the Fed, showing that inflation was on a downtrend. Powell noted that the report was what the central bank wanted to see. Therefore, it removed some doubt brought about by the consumer and producer inflation figures. At the same time, investors gained confidence that the Fed would cut rates by 75 bps this year.
The Canadian dollar gained on Friday, a day after an upbeat GDP report. Canada’s gross domestic product rebounded in January, reducing pressure on the Bank of Canada to cut interest rates. As a result, bets for a cut in June slipped below 70%.
Meanwhile, the Australian dollar increased after a report on Thursday showed an increase in retail sales in February. Consumers in Australia spent more in February due to Taylor Swift concerts. Therefore, it was probably a one-time spike in sales. Australia’s economy is slowing down along with inflation. On Wednesday, the country’s inflation figures missed forecasts, holding at 3.4% from the previous month. As a result, RBA rate cut bets edged up.
Elsewhere, the yen strengthened slightly on Friday due to speculation of a possible intervention. Japanese authorities kept warning traders last week against speculative moves. According to Japan, the recent decline in the yen reflects speculation rather than fundamental factors. Therefore, there is a high chance of an intervention to prevent sharp declines.
Yen bulls gained confidence after news of a meeting between the Bank of Japan, the Ministry of Finance, and the Financial Services Agency. However, data revealed an increase in short yen positions, nearing the two-year high of $ 11 billion. This is a sign that most market participants are bearish on the currency.
