Fundamental Analysis

Currency Futures Struggle as Core PCE Boosts Dollar

  • US underlying inflation increased by 0.3% in March, as expected.
  • The likelihood of a Fed rate cut in September fell to 58%.
  • Wholesale trade in Canada fell by 1.3% in March.

Currency futures fell on Friday as the dollar rose after inflation data in the US led to a drop in Fed’s rate cut expectations. The US released its Personal Consumption Expenditures (PCE) price index report, which showed inflation increased by 0.3% in March as expected. This was the same rate of increase in the previous month, a sign that the decline has paused. Consequently, investors scaled back expectations that the Fed will implement the first cut in September.

US underlying inflation (Source: Bureau of Economic Analysis)

US underlying inflation (Source: Bureau of Economic Analysis)

Additionally, although the monthly figure met expectations, the annual figure increased by 2.7%, beating forecasts for an increase of 2.6%. Clearly, inflation remains above the Fed’s 2%. Moreover, the downtrend has been bumpy, leading to a loss of confidence among policymakers that it will reach the target.

After the PCE report, the likelihood of a rate cut in September fell to 58%. Meanwhile, the chances of a cut in December rose to 80%. This puts the Fed behind most other major central banks, including the Bank of Canada, the ECB, and the Bank of England. Moreover, it places the US dollar in a stronger position, which might lead to more declines for currency futures.

The Canadian dollar fell on Friday as domestic data further highlighted the divergence in policy outlooks between the BoC and the Fed. Wholesale trade in Canada fell by 1.3% in March from the previous month, indicating weaker economic activity in the economy. Recent data has shown a deterioration in Canada’s economy, which will likely push the BoC to start cutting interest rates in June. As this is well ahead of the Fed, it could mean more weakness for the loonie.

Meanwhile, the pound and the euro fell on Friday due to dollar strength. However, both currency futures recorded the most significant weekly gains since March. These gains came from upbeat business activity data from the Eurozone and the UK earlier in the week. 

Elsewhere, the yen fell significantly after the Bank of Japan held interest rates. Although the central bank signaled more rate hikes in the future, there was no clear guidance on when they would come. Additionally, the stronger dollar weighed, leading to speculation of a looming intervention. Early Monday, the yen strengthened sharply, indicating that the BoJ likely intervened to strengthen its currency.