- US producer prices fell in December, increasing the likelihood of an early US rate cut.
- Fed funds futures indicate a 79% probability of a March rate cut, up from 73% on Thursday.
- The US dollar gained earlier due to risk aversion after strikes on Yemen.
On Friday, currency futures fell despite a drop in US producer prices in December, increasing the likelihood of an early US rate cut. At the same time, the dollar fell after rising during the day due to safety buying following US and British military actions in Yemen.
US producer prices (Source: Bureau of Labor Statistics)
The producer price index dropped last month, driven by lower goods costs, while service prices remained unchanged. This increased the chances of lower inflation in the upcoming months, prompting traders to increase bets on a future rate cut.
“The inflation pipeline is easing, and consumer prices will slowly reach the Fed’s 2% target,” stated Jeffrey Roach, LPL Financial’s chief economist in Charlotte, North Carolina.
There was a 0.1% decrease in the producer price index last month. Meanwhile, November’s data was revised to indicate a 0.1% decline. This marks the third consecutive monthly decline for the PPI. Meanwhile, there was a 0.4% drop in goods prices, driven by a significant 12.4% reduction in the cost of diesel fuel, contributing to half of the overall decrease.
Fed funds futures now indicate a 79% probability of a March rate cut, up from 73% on Thursday. Despite consumer price inflation exceeding expectations and a strong December jobs report, markets are optimistic about a March rate cut. Most economists, however, lean towards May or June. The Fed has increased its policy rate by 525 basis points since March 2022.
Still, currency movements were likely tempered by traders closing positions ahead of the US long weekend, with markets closed on Monday for the Martin Luther King Jr. holiday.
The US dollar gained earlier in the session due to risk aversion after strikes on Yemen in retaliation for attacks by Iran-backed Houthi forces. This escalated regional conflict from Israel’s war in Gaza, leading to higher oil prices. As a result, the euro, exposed to increased energy costs, fell by 0.15%.
Meanwhile, the pound dropped 0.12% after data revealed slight growth in Britain’s economy in November, but with a risk of a mild recession. The New Zealand and Australian currencies initially performed well after Friday’s data but later fell.
