US Dollar Slips as Inflation Data Shows Modest Rise, Fed Meeting Looms
U.S. Dollar and Inflation Data
The U.S. dollar edged lower on Friday after reports indicated that inflation had increased modestly in December but was on a downward trend. This trend is expected to keep the Federal Reserve on course to reduce interest rates by mid-year.
Market Volume and Upcoming Events
Market volume diminished as the weekend approached, with investors preparing for a series of significant U.S. economic data releases in the following week. These events include non-farm payrolls for January and key meetings such as the Federal Open Market Committee meeting and the Treasury’s refunding announcement, outlining the U.S. government’s borrowing requirements for the upcoming quarter.
Greenback Performance and Inflation Figures
Despite the looming Fed decision, the greenback was on track to post gains for four consecutive weeks. The dollar was last down 0.1% at 103.41. Data revealed that the personal consumption expenditures (PCE) price index rose 0.2% in December, in line with consensus expectations. The annual inflation rate was under 3% for the third straight month, aligning with the Fed’s 2% inflation target.
Expert Analysis and Market Expectations
Market experts noted that recent data suggests rising inflation should not be a major concern at the moment. This sentiment supports the view that further tightening of monetary policy is unlikely. Currency analysts at MUFG indicated that U.S. economic data presented a mixed picture for monetary policy, ahead of the Fed’s next policy statement on Jan. 31.
Rate Futures and Market Expectations
Post-inflation data, U.S. rate futures market priced in a roughly 47% chance of easing at the March meeting, down from late Thursday’s 51% probability. The market is fully pricing in the first rate cut to occur at the May meeting, with a roughly 90% probability, down slightly from late Thursday, which was at 94%. About five rate cuts of 25 basis points each have been priced in this year.
Global Currency Movements
In other currency pairs, the greenback rose 0.3% versus the yen to 148.06. The dollar, however, was down 0.3 for the week, on pace for its largest weekly decline since Dec. 25. The euro was up 0.1% at $1.0856, rebounding from a six-week low hit earlier in the session after a survey showed weaker-than-expected German consumer sentiment.
ECB and Other Central Banks
ECB policymaker Martins Kazaks also said on Friday the central bank was on the right path to lower inflation but patience was required before policy can be reversed. Sterling was last slightly down against the dollar at $1.2702, ahead of a Bank of England decision on interest rates next Thursday.
