The U.S. dollar surged on Friday following the release of data showing a key inflation measure that met expectations. Alongside this, personal spending and income showed an increase, reinforcing the view that the Federal Reserve may opt for a smaller 25 basis point interest rate cut next month, rather than the previously speculated 50 point cut.
Market participants who were anticipating a larger cut had been under the impression that the Federal Reserve was lagging behind in terms of easing and needed to play catch up. Despite that, U.S. rate futures on Friday indicated a 31% likelihood of a 50 basis point rate cut next month, down from the previous day’s 35%. This data, according to LSEG calculations, combined with the market fully pricing in a rate cut at the Fed’s September meeting, marking its first easing in over four years.
The dollar saw an increase of 0.8% against the yen following the inflation data, marking its most significant daily gain in two weeks. It was also up 1.2% for the week, on track for its largest weekly rise since mid-June. However, despite these gains, the dollar had still fallen 2.6% for the month of August, declining for the second consecutive month against the Japanese yen.
The personal consumption expenditures (PCE) price index displayed a 0.2% increase last month, in line with expectations, and consumer spending also saw a 0.5% rise after a 0.3% upturn in June. The possibility of a rate cut by the Fed still remains uncertain, with predictions ranging from 25 to 50 basis points, depending on the upcoming employment data. Some economists foresee three rate cuts, consisting of either a 25 basis point cut in September and a 50 basis point cut in December, or a 50 basis point cut in September and two more in December.
The dollar index, which measures its value against six major peers, hit a 10-day high post the inflation data. The overall sentiment regarding the dollar has been positive for the week, with it surging by 1% and showing the best weekly performance since early April. Despite this, the index faced a 2.6% decline for the month of August, marking its weakest performance since November last year.
Data from the University of Michigan’s monthly consumer sentiment survey showed a slight improvement in August, with consumers expecting inflation to moderate in the coming year. In the currency market, the euro dipped against the dollar, reflecting a 1.3% weekly loss, marking the largest since April. However, the euro climbed significantly in the month of August, increasing by 2.1%, as the European Central Bank gears towards another interest rate cut next month.
The Chinese yuan showed strength against the dollar, reaching a 14-month high, with a substantial monthly surge since November. This increase was backed by growing corporate demand for the Chinese currency, as expectations of U.S. rate cuts mount. The yuan’s performance remained strong throughout the month, showcasing a rise of approximately 1.9% for August.
Ultimately, the data suggests a mixed bag of results for the U.S. dollar, with market participants eagerly awaiting the upcoming employment data, as well as the final decision by the Federal Reserve regarding interest rates cuts in the near future.