- The dollar registered its first monthly decline of the year in May.
- The US core PCE price index fell from 0.3% to 0.2% in April.
- Tokyo’s core inflation increased in May, but price increases, excluding fuel, eased.
Currency futures ended higher as the dollar retreated after data revealed a slight cooling of inflation in the US. Economic data from regions like Japan and the Eurozone also affected currency futures.
The US dollar had its first monthly decline in May due to lower-than-expected inflation. The first three months of the year saw the US report hotter-than-expected inflation figures that raised alarm among policymakers. Some were ready to start hiking interest rates if the trend continued. However, in May, there was a shift as consumer inflation eased.
US core PCE price index (Source: Bureau of Economic Analysis)
Data from Friday showed that the core PCE price index dropped from 0.3% to 0.2% in April, indicating a decrease in price increases. As a result, the chances of a Fed cut in September increased from 49% to 53%. Still, analysts were disappointed with the overall report, which showed that the decline in inflation was slow.
Additionally, policymakers will need much more to shift from their previous hawkish tone to a dovish one. Although the report is a step forward, policymakers need more reports to confirm that inflation is decreasing.
Meanwhile, Japan’s inflation picture was mixed. Tokyo’s core inflation increased in May, but price increases, excluding fuel, eased. This makes it difficult to predict when Japan will raise interest rates, which would help close the gap between Japanese and US rates. As a result, the yen fell against the dollar on Friday.
Furthermore, data revealed that Japan spent $62.2 billion intervening in the forex market in April and May this year. However, the operation’s impact was only temporary, as the yen has given back most of its gains.
On the other hand, the euro rose after inflation data revealed a bigger-than-expected increase. Inflation in the Eurozone was inching closer to the 2% target. However, in May, it went up to 2.6% from 2.4% the previous month. Although this did not affect expectations for the ECB’s June cut, it complicated the outlook after June. Policymakers will likely call for a pause after the June cut.
