- Data on Friday revealed a recovery in US factory output in February.
- Data on consumer sentiment and inflation expectations barely changed from February.
- Companies in Japan agreed on big pay increases.
Currency futures closed lower on Friday as the dollar strengthened on more signs the US economy was resilient. Data released on Friday on the manufacturing sector revealed a strong economy that could allow the Federal Reserve to hold higher interest rates for longer.
US factory production (Source: Federal Reserve)
Data revealed a recovery in factory output in February as the country got some relief from low temperatures. Manufacturing drives over 10% of the US economy, making it a major indicator of economic performance. However, manufacturing remains vulnerable due to high borrowing costs. Furthermore, as rate cut expectations drop, the period for higher interest rates is prolonged.
Treasury yields, which reflect interest rate expectations, rose after this and other economic reports this week. Moreover, investors now expect less than 3 Fed rate cuts this year. When the year began, markets had priced in 3 or 4 cuts in 2024. Additionally, when the week began, there was a 71% probability of a June Fed rate cut. However, by the end of the week, the probability had fallen to 57%.
Elsewhere, data on consumer sentiment and inflation expectations barely changed from February. Consumers expect inflation to be 3.0% in the next year and 2.9% in the next 5 years.
The Federal Reserve will meet on Wednesday this week and will likely maintain current interest rates. However, there is a chance that policymakers will be less dovish after the recent surprise in inflation figures. Consequently, the rate cut outlook could change. Investors are also looking forward to policy decisions in the UK and Japan.
Notably, the pound weakened last week amid a decline in Fed rate cut expectations. The currency has lost its edge recently as the gap in rate cut outlooks between the BoE and the Fed has gradually closed. Markets expect the first rate cuts in the UK and the US in June. Still, the Fed will likely cut more than the BoE. Moreover, the BoE will likely maintain a neutral tone at the policy meeting as inflation remains high.
Meanwhile, the yen weakened against the dollar on Friday. Although fundamentals supported a strong yen, dollar strength weighed on the currency. On Friday, companies in Japan agreed on big pay increases. Consequently, there is speculation that the BoJ might be ready to hike rates on Tuesday.
