- The US CPI increased by 0.2% in February, missing forecasts.
- Data on Friday revealed a sharp drop in US consumer confidence.
- The Canadian dollar gained after Mark Carney became Canada’s new prime minister.
Currency futures extended Friday’s gains as the dollar weakened amid US recession worries and downbeat economic data. Moreover, the dollar eased as the euro soared on optimism of increased government borrowing and spending in Germany.
The dollar had a difficult week as the US released several poor economic reports. The major ones revealed softer-than-expected inflation. Notably, the US CPI increased by 0.2% in February, a significant drop from the previous month’s 0.5% increase. Meanwhile, the annual figure increased by 2.8%, down from 3.0% in January. The report showed that inflation has resumed its downtrend.
Furthermore, a separate report on Thursday showed no change in wholesale inflation in February. Meanwhile, economists had forecasted a 0.3% increase. Weak inflation increases the likelihood the Fed will lower borrowing costs. Therefore, it is bearish for the dollar and bullish for currency futures.
However, Trump’s trade policies have created a lot of uncertainty regarding the future. Trade wars will hurt economic growth, piling pressure on the Fed to cut interest rates. However, these tariffs will also increase the cost of goods, increasing inflation. Therefore, the US Central Bank must remain cautious in balancing growth and inflation.
US consumer sentiment/inflation expectations (Source: UoM, Bloomberg News)
Data on Friday revealed a sharp drop in US consumer confidence, confirming recent recession worries. Meanwhile, another report showed a surge in inflation expectations. The inflation expectations helped the dollar recover slightly against the yen.
Meanwhile, the Canadian dollar gained after Mark Carney became Canada’s new prime minister. The former central banker said he was ready to work with Trump to avoid the impact of tariffs on Canada’s economy. Meanwhile, the Bank of Canada lowered borrowing costs but assumed a more cautious tone. Tariff uncertainty has clouded the outlook for monetary policy.
On the other hand, the euro rallied after reports that parties in Germany had closed a fiscal deal to increase the country’s borrowing limits. This will allow them to start the proposed 500 billion fund for infrastructure and defense, boosting the outlook for the Eurozone economy. Increased spending might also boost inflation, shifting the outlook for ECB policy.
The pound eased slightly on Friday after data revealed an unexpected contraction in the UK economy. As a result, BoE rate cut expectations rose.
