- The US PCE price index showed an expected increase of 0.2% in July.
- The likelihood of a super-sized 50 bps Fed rate cut fell from 35% to 31%.
- Economists expect an additional 164,000 jobs in the US in July.
Currency futures fell on Friday after US data solidified bets for a smaller 25 bps September Fed rate cut, boosting the US dollar. Data throughout last week showed that the US economy remains resilient, dismissing fears of a recession.
Fed rate cut bets (Source: Bloomberg)
The dollar had a bullish day on Friday after the PCE price index showed an expected increase of 0.2% in July. This figure was an increase from the previous month when inflation rose by 0.1%. Consequently, the likelihood of a super-sized 50 bps rate cut fell from 35% to 31%. A smaller rate cut by the Fed in September means a gradual cycle.
Last week, reports revealed that US consumer confidence soared. At the same time, the economy expanded by a bigger-than-expected 3.0%. These figures gave the dollar a 1% boost for the week. However, it lost over 2.5% in August after Powell opened the door to a rate cut in September.
Although markets expect a gradual rate-cutting phase, this outlook might change with the upcoming US nonfarm payrolls report. Initially, the US monthly report raised fears about an economic slowdown, boosting expectations for an aggressive Fed. Therefore, another downbeat report could bring back these bets, pushing the dollar lower and supporting currency futures.
Economists expect an additional 164,000 jobs in July, higher than the previous reading of 114,000. Meanwhile, they expect the unemployment rate to drop from 4.3% to 4.2%. If this is the case, the dollar will rally in support of a less aggressive Fed rate-cutting cycle. On the other hand, if employment growth drops and unemployment is higher than expected, currency futures will rally. At the same time, markets will anticipate a more dovish Fed.
The Canadian dollar fell on Friday due to dollar strength and a decline in oil prices. Notably, oil plunged 2.8% amid concerns about increased supply from OPEC+. Nevertheless, the loonie had a bullish week after a rally in oil due to Middle East tensions. Additionally, Canada’s GDP increased by 2.1%, compared to estimates of 1.6%.
Meanwhile, the Euro weakened after poor German inflation data increased the likelihood of an ECB rate cut in September. At the same time, data revealed that Eurozone inflation eased from 2.6% to 2.2%, coming closer to the central bank’s target.
