- The Fed forecasted only 50-bps of cuts in 2025.
- The US core PCE price index increased by 0.1%, below forecasts of 0.2%.
- Retail sales in the UK increased by 0.2%, compared to expectations of 0.5%.
Currency futures collapsed on Monday as the dollar regained momentum after a brief pause on Friday. The dollar’s rally last week came after a hawkish FOMC policy meeting. However, it paused on Friday as US inflation figures came in softer than expected, allowing currency futures to rebound.
The Greenback had a bullish week amid upbeat US economic data and a hawkish Fed rate cut. Economic data showed that business activity and consumer spending in the economy were strong.
Meanwhile, as expected, the Fed cut rates by 25-bps on Wednesday. However, the surprise came when policymakers forecasted only 50-bps of cuts in 2025. This was a 50-bps drop from the forecast in September. It was a clear indication that policymakers had lost confidence in the progress to lower inflation. Moreover, it showed uncertainty about the state of inflation under Trump’s administration.
Trump’s policy proposals have recently changed the outlook for the US economy and inflation. Tax cuts and tariffs on imported goods will favor local businesses and boost the economy. Meanwhile, consumer prices will increase, putting the Fed in a tight corner.
The US economy has remained resilient despite high interest rates. Therefore, under Trump, the economy might heat up enough to cause a spike in inflation. This outlook has created uncertainty about lowering borrowing costs too fast. As a result, the dollar has rallied while currency futures dropped.
US underlying inflation (Source: Bureau of Economic Analysis)
However, currency futures got some relief on Friday after the US core PCE price index increased by 0.1%, below forecasts of 0.2%. The downbeat report was a relief for the Fed as it showed some progress in bringing down inflation. However, by Monday, the dollar rally resumed as market focus shifted back to the 2025 Fed outlook.
The pound rebounded on Friday despite data showing weak consumer spending in the UK. Notably, retail sales in the country increased by 0.2%, compared to expectations of a 0.5% jump. The UK economy has shown mixed figures that have clouded the outlook for rate cuts. Nevertheless, the BoE might remain cautious due to still-high inflation.
Meanwhile, in Canada, sales increased by 0.6%, missing forecasts of 0.7%. However, the Canadian dollar also recovered amid dollar weakness.
