- Data indicated decreased consumer spending in the US.
- The market’s pricing indicates an 84.3% chance of a hike, down from 89.3%.
- Data revealed that core inflation in Tokyo slightly increased in June.
On Friday, currency futures rose as the dollar decreased after gaining for two consecutive days. This drop resulted from economic data indicating decreased consumer spending, which raised doubts about the Federal Reserve’s aggressive approach to combating inflation.
US PCE price index (Source: Bureau of Economic Analysis)
According to the Commerce Department, consumer spending rose slightly in May. However, the data for the previous month was revised to show spending growth of 0.6% compared to the previously reported 0.8%. Personal consumption expenditures rose by 0.1% in May, slowing down from the 0.4% increase in April.
The dollar index had risen by 0.82% in the preceding two sessions due to comments from Fed Chair Jerome Powell and positive economic data. This heightened market expectations of two more interest rate hikes by the US central bank this year. It also diminished the belief in a possible rate cut by the end of the year.
However, the expectations for a 25 basis points hike at the Fed’s July meeting slightly decreased. According to CME’s FedWatch Tool, the market’s current pricing indicates an 84.3% chance of a hike, down from 89.3% on Thursday.
Meanwhile, the Japanese yen strengthened and halted its three-day decline against the greenback. Investors have kept an eye on the movement of the yen as the Bank of Japan’s policies continue to differ from those of the US Federal Reserve. The greenback has seen a nearly 9% increase against the yen in the quarter, making it the strongest in a year.
On Friday, Japan’s Finance Minister, Shunichi Suzuki, cautioned that appropriate measures would be taken if the yen weakened. He also advised against excessive selling of the yen by investors.
Earlier data revealed that core inflation in Tokyo slightly increased in June and remained above the Bank of Japan’s 2% target for the 13th consecutive month. This pressures the bank policymakers to gradually reduce their accommodative monetary policy.
In contrast, Eurozone inflation data declined for the third consecutive month, with a small decrease in underlying inflation. However, this will unlikely prevent the European Central Bank from raising rates at its July meeting.
Furthermore, data indicated that Britain’s economy only grew by 0.1% in the first quarter, primarily due to inflation eroding household disposable income.