- The dollar eased on Friday as traders took profits after a three-day rally.
- Data on Thursday showed US unemployment claims fell in the previous week.
- The likelihood of a Fed rate cut eased further to 52%.
Currency futures rose on Friday as the dollar retreated after three sessions of gains. It extended this move at the start of the new week. Moreover, the greenback had a slightly bearish week but closed well above its lows as Fed rate cut expectations eased.
After a volatile week, the dollar eased on Friday as traders took profits after a three-day rally. When the week began, the dollar plunged as investors panicked after a downbeat US monthly jobs report. The view in the market was that the Fed had held on to high rates for too long. As a result, the economy was slowing down fast, which could end in a recession.
These fears boosted safe-haven currencies like the yen and the Swiss franc. Meanwhile, the US dollar plunged. At the same time, markets moved to fully price in a 50-bps rate cut in September. However, calm soon returned when policymakers said the risk of a recession remained low. At the same time, data on US service activity showed the sector expanded. As a result, Fed rate cut expectations fell.
Furthermore, data on Thursday showed that US unemployment claims had fallen in the previous week. This report was further evidence that the US economy was still strong. Consequently, the likelihood of a Fed rate cut eased to 52%. Meanwhile, the focus shifted to the upcoming US inflation report on Friday.
US inflation (Source: Bureau of Labor Statistics, Bloomberg)
With each new economic report, Fed rate cut expectations keep changing. According to experts, the CPI might remain steady at 3.0% annually. Meanwhile, the monthly figure could increase by 0.2% after the first inflation decline in the previous month.
Notably, Fed policymakers have said they expect a rate cut in September if inflation meets expectations. A bigger-than-expected reading could lower rate cut expectations and hurt currency futures.
The Canadian dollar strengthened on Friday, posting its biggest weekly gain in eight months. A mixed employment report had little impact on BoC rate cut expectations. 2,800 Canadians lost jobs while the unemployment rate held steady at 6.4%.
Meanwhile, the pound strengthened but declined another week due to the increased likelihood of more BoE rate cuts. Markets are currently pricing in 42 bps rate cuts in 2024.
