- Fed policymakers were less confident in the decline in inflation than markets had expected.
- Fed’s John Williams said there was no need to change his stance on monetary policy.
- Eurozone inflation data met expectations at 2.4% in April.
Currency futures rose on Friday as the dollar fell amid rate cut speculation after the US consumer inflation report. However, policymakers maintained a slightly hawkish tone, putting a floor on further declines in the dollar.
Dollar index (Source: Bloomberg)
Last week, the US released several economic reports that led to an increase in Fed rate cut expectations. Notably, the consumer price index report revealed a drop in inflation in April. Additionally, the retail sales report was flat, showing no growth last month. As a result, investors were convinced that the Fed had more reason to start cutting interest rates in September. This led to a surge in rate-cut bets, with markets expecting 50 basis points of rate cuts this year. As a result, the dollar fell.
However, soon after, the outlook changed a bit when more data on Thursday revealed a jump in import prices by 0.9%. This raised fears that imported inflation might still be a challenge even after the Fed succeeds in lowering prices in the US.
Furthermore, policymakers were less confident in the decline in inflation than markets had expected. Most Fed officials maintained a cautious tone, noting that inflation was still high. Moreover, they remained mostly silent about when rate cuts might begin. This caution comes due to the hotter-than-expected inflation figures in Q1.
Notably, Fed’s John Williams said there was no need to change his stance on monetary policy. This shows that the inflation report did little to make him more dovish. Meanwhile, Thomas Barkin noted that although the retail sales figures were not great, they were still good. Therefore, consumer demand was still high. Moreover, he said that it would take time to get inflation back to the central bank’s 2% target. Finally, Loretta Mester said the progress in inflation so far has been disappointing. By Friday, investors were expecting a lower 45 basis points of Fed cuts in 2024.
The euro rose against a weaker dollar after Eurozone inflation data met expectations at 2.4% in April. ECB policymakers are convinced inflation will hit the target next year. Meanwhile, the Canadian dollar strengthened as investors prepared for Canada’s inflation report. There is still a high chance the BoC will start cutting rates in June or July.
