- Powell expressed caution about further interest rate moves.
- US rate futures indicated a 64% chance of a rate cut by the March Fed meeting.
- US economic activity is slowing as increased interest rates reduce demand.
On Friday, currency futures rose while the dollar declined after Federal Reserve Chair Jerome Powell expressed caution about further interest rate moves. Investors perceived Powell’s comments as dovish, anticipating that the Fed is done raising rates.
Powell acknowledged that US monetary policy is slowing the economy, with the benchmark overnight interest rate in restrictive territory. Despite this, he emphasized the Fed’s readiness to tighten policy further if necessary. The US dollar index, tracking the currency against six major counterparts, closed lower after its weakest monthly performance in a year in November.
Following Powell’s remarks, US rate futures indicated a 64% chance of a rate cut by the March meeting, up from 43% on Thursday. For the May meeting, the chances surged to 90%, compared to about 76% the day before.
Moreover, weak US manufacturing data for November confirmed that Fed rate hikes are slowing the economy. The Institute for Supply Management announced a manufacturing PMI of 46.7, marking the 13th consecutive month below 50, indicating contraction.
US consumer spending and inflation (Source: Bureau of Economic Analysis)
The ISM survey came after Thursday’s data indicating moderate growth in consumer spending and decreasing inflation in October. Economic activity is slowing as increased interest rates reduce demand. Despite this, most economists anticipate no recession in the coming year and believe the Federal Reserve can achieve a “soft landing.”
Softer Eurozone inflation data on Thursday strengthened expectations of no further interest rate hikes. Goldman Sachs forecasted the European Central Bank’s first rate cut in Q2 2024, earlier than their previous prediction for a cut in Q3.
Moreover, a survey showed a slight easing of the downturn in Eurozone manufacturing activity. Meanwhile, Britain reported manufacturing contraction but an improved reading for the third straight month. This saw the pound increase.
The euro benefited from a dollar sell-off after Powell’s comments. The dollar dropped against the yen, recording its third straight week of gains and moving away from the near 33-year low of 151.92 per dollar in mid-November. The yen found support from rising expectations that the Bank of Japan will abandon its ultra-easy monetary policy next year. Additionally, a drop in US yields has supported the Asian currency in recent weeks.
