- The US core PCE increased by 2.5% annually, as expected.
- Data throughout last week showed the US economy remained robust.
- There is a 64% chance the BoJ will hike rates this week by 10bps.
Currency futures edged higher on Friday as the dollar eased after inflation data met expectations. Consequently, the markets are continuing to anticipate that the Federal Reserve will commence reducing borrowing rates in September.
However, the markets were in turmoil as the new week started. The looming BoJ and BoE policy meetings and poor risk appetite lends room to the dollar being a safe-haven asset.
Underlying US inflation (Source: Bureau of Economic Analysis)
Fed rate cut expectations remained intact on Friday as the PCE price index increased by 0.1% as expected. At the same time, the core PCE increased by 2.5% annually, easing from an increase of 2.6% in May. After the report, the dollar edged lower, allowing most major currencies to climb.
However, data throughout last week showed the US economy remained robust despite high interest rates. Notably, business activity increased, and the economy expanded by an unexpected 2.8% in Q2. As a result, there is little expectation that the Fed will surprise with a 50bps cut in September. Additionally, policymakers might maintain a cautious tone during this week’s meeting.
Nevertheless, inflation has maintained its progress toward the 2% target. Moreover, investors were relieved by Friday’s PCE figure since it was lower than the 2.9% reported in the GDP release. If there is hope for rate cuts in the US, the dollar will remain vulnerable, and currency futures will rise.
The pound rose slightly on Friday amid dollar weakness. At the same time, investors were gearing up for the Bank of England meeting. Futures show a 50% chance that policymakers will vote to cut rates. Furthermore, the outlook for BoE rate cuts is more dovish now since US inflation is back on a downtrend. Consequently, the Fed might assume a more dovish tone, allowing other major central banks to do the same.
Meanwhile, after a stellar week, the yen remained strong on Friday due to increased expectations for a BoJ rate hike. The Bank of Japan has been pressured to tighten monetary policy and support its weak currency. Currently, there is a 64% chance the central bank will hike rates this week by 10bps.
Elsewhere, the Canadian dollar went against the trend and fell amid a decline in oil prices. The decline in oil came from demand concerns and the increasing likelihood of a ceasefire in the Gaza war. At the same time, the loonie fell due to increased expectations for a September BoC rate cut.
