Currencies Stabilize After US Inflation Data

With PCE data released last week indicating that U.S. inflation had stabilised in April, the currency market began the week cautiously, with the dollar marginally down on Monday. This suggests that the Federal Reserve may decide to drop interest rates later in the year.

May saw the dollar record its first monthly loss of the year as a result of fluctuating forecasts regarding the timing and magnitude of rate cuts by the US central bank.

After data on Friday revealed that the personal consumption expenditures (PCE) price index gained 0.3% last month, mirroring the unrevised gain in March, markets are pricing in 37 basis points of cuts from the Fed this year.

Traders had been pricing in a roughly 49% likelihood of a rate decrease in September before the release of the PCE data; now they are pricing in a roughly 53% possibility.

The PCE index rose 2.7% year over year in April, the same rate as in March, indicating that price pressures are still above the Fed’s 2% target. This indicates that the markets are still uncertain about whether the Fed would lower rates more than once in 2024.

The dollar index, which compares the value of the US dollar to six competitors, fell 0.067% to 104.51 on Monday. In May, the index dropped 1.56%.

The euro last traded at $1.085325 ahead of the European Central Bank’s (ECB) policy meeting on Thursday, when rate cuts are expected to be announced. Sterling was up 0.04% at $1.27475.

Trader attention will be focused on the remarks made by ECB officials as well as economic forecasts as they determine if the central bank would implement additional cuts following Thursday in response to data indicating an increase in May inflation in the euro zone.

The government of Japan spent 9.79 trillion yen ($62.23 billion) intervening in the foreign exchange market to strengthen the yen throughout the course of the previous month, according to figures issued by the ministry on Friday.

The figures supported traders’ and experts’ concerns that Tokyo intervened in the market twice in large amounts, selling dollars in large quantities, soon after the yen fell to a 34-year low of 160.245 per dollar on April 29 and again in the early hours of May 2.

In early trade on Monday, the yen was last seen at 157.15 per dollar.

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