- The dollar declined against major currencies after new data showed a slowdown in inflation.
- The Bank of Japan adjusted its yield curve control policy.
- Canada’s economy is expected to have contracted by 0.2% in June.
Currency futures rose on Friday as the dollar declined against major currencies after new data showed a slowdown in inflation. Investors were also closely monitoring multiple central bank decisions last week to gain insights into the future of monetary policy.
US inflation (Source: Bureau of Economic Analysis)
In June, US annual inflation rose at its slowest rate in over two years, with underlying price pressures easing. If this trend continues, the Federal Reserve could be closer to ending its rapid interest rate hiking cycle. The Commerce Department disclosed that the personal consumption expenditures index increased by 3.0%, the smallest gain since March 2021.
In response to expected interest-rate hikes, the dollar index fell while the euro strengthened. The Fed and the European Central Bank had announced the rate hikes earlier in the week. The ECB also mentioned the possibility of pausing the rate hikes in September as inflation pressures show signs of easing amid concerns about a potential recession.
Regarding the September meeting, Fed Chair Jerome Powell did not provide many clues, leaving the possibility of further rate hikes open.
On Friday, the Bank of Japan adjusted its yield curve control policy, resulting in the yen experiencing its most volatile trading session in months. Investors now wonder if this indicates an eventual shift in the massive stimulus program.
The BOJ’s current measures include buying 10-year Japanese government bonds (JGB) at 1.0% and maintaining a short-term interest rate of minus 0.1%.
Meanwhile, the Canadian dollar declined slightly against the US dollar as preliminary data indicated a contraction in the domestic economy in June. This contraction could be a signal that the impact of higher borrowing costs is beginning to slow economic activity.
Notably, Canada’s economy had grown by 0.3% in May but is expected to have contracted by 0.2% in June, indicating a potential slowdown. This slowdown may lead to the conclusion of the Bank of Canada’s monetary tightening campaign, which had driven interest rates to a 22-year high.
On the other hand, the pound experienced a slight increase on Friday but remained close to two-week lows. The recent series of central bank decisions during the week reinforced expectations that the Bank of England will unlikely implement another substantial rate hike in the upcoming week.