- Cooler-than-expected US inflation increased market expectations for an earlier Fed rate cut.
- Data showed a slight increase in US single-family home building in October.
- Eurostat data confirmed a sharp slowdown in October year-on-year inflation in the Eurozone.
Currency futures rose on Friday while the dollar experienced its second-largest weekly decline against major currencies this year. Concerns about the global economic outlook are growing.
At the same time, cooler-than-expected US inflation data on Tuesday and Wednesday increased market expectations for an earlier Fed rate cut. This potential move, expected as early as the first quarter of next year, could weaken the dollar more. The dollar index, measuring the dollar against six major currencies, reached lows last seen on Sept. 1, and the yield on 10-year Treasury notes fell to a two-month low of 4.379%.
Although data showed a slight increase in US single-family homebuilding in October, the leading market driver remained inflation, keeping the dollar lower for the day.
Thierry Wizman, global FX strategist at Macquarie in New York, suggested that everything points towards a fourth-quarter slowdown in the United States. Key indicators will be companies lowering growth expectations.
Eurozone inflation (Source: Eurostat)
The euro rose 0.52% to $1.0906 despite data confirming a sharp slowdown in year-on-year inflation in the Eurozone in October. The yen, previously weakened by dollar strength, broke the 150 mark for the first time in nearly two weeks, gaining 0.69% to 149.68 against the dollar. On Friday, Deputy Finance Minister Ryosei Akazawa mentioned that Japanese authorities do not consider specific exchange-rate levels when deciding on currency market intervention.
An analyst at MUFG, Lee Hardman, attributed the yen’s strength to rising global concerns about weaker growth. Moreover, he noted that Japanese terms of trade were less affected by falling energy prices.
Meanwhile, despite weaker-than-expected retail sales figures in Britain, sterling increased to $1.2458, up 0.42% on the day. Poor global data raised concerns about economies but indicated that central banks may succeed in their fight against soaring prices.
Futures markets are pricing in 93 basis points of cuts in the Fed’s overnight lending rate by December 2024, contributing to dollar weakness. Moreover, money markets have almost entirely priced in 100 basis points of rate cuts in the Eurozone next year. Nevertheless, European Central Bank policymakers Robert Holzmann and Joachim Nagel emphasized on Friday that the bloc must be prepared to raise interest rates again if necessary.
