- The dollar closed the week with gains, marking the fourth week of gains.
- The consumer price index on Tuesday is among the major economic reports the Fed will watch.
- Traders scaled back expectations that the BoJ would aggressively raise rates.
Currency futures rose on Friday as the dollar fell after data showed inflation rose less than reported in December. However, this revision failed to change the outlook for rate cuts in the US. Additionally, it became clear that inflation rose more than previously reported in October and November.
Meanwhile, the dollar closed the week with gains, marking the fourth week of gains. These gains came mainly from hawkish Fed remarks throughout the week. Policymakers maintained that there was no hurry in cutting rates as the economy was still resilient. Moreover, inflation must show a clear downtrend to the 2% target. Otherwise, the central bank will keep holding on to high interest rates as policymakers assess incoming data.
US inflation estimates (Source: Bureau of Labor Statistics, Bloomberg)
The consumer price index on Tuesday is among the major economic reports the Fed will watch. Although some of the revisions on Friday revealed higher-than-expected increases in inflation, the overall direction remains down. Therefore, some experts believe that the report on Tuesday will reveal a decline in inflation, supporting expectations for Fed rate cuts.
A bigger-than-expected decline could bring back bets for a March rate cut. On the other hand, if the report beats forecasts, it might lead to a drop in bets for a May cut. Currently, markets have nearly ruled out the likelihood that the Fed will cut rates in March. At the same time, the chances of a May cut have dropped to 60%.
Notably, the yen had the biggest move on Friday as traders scaled back expectations that the BoJ would aggressively raise rates. The yen fell to a 10-week low after BoJ Governor Ueda said easy monetary conditions might remain even after a shift to rate hikes. Consequently, Japan’s Finance Minister Shunichi Suzuki warned that he was carefully watching currency moves. However, this had little impact on the yen.
Meanwhile, the pound and the euro were also strong on Friday, supported by hawkish comments from policymakers. As a result, traders are pushing back bets on rate cuts by the European Central Bank and the Bank of England. Moreover, they eagerly await the UK’s inflation report on Wednesday for more clues on when the BoE might start cutting rates.