The dollar index (DXY00) on Friday fell by -0.15%. The dollar came under pressure Friday after the U.S. Dec PCE core deflator, the Fed’s preferred measure of inflation, rose less than expected, bolstering expectations that the Fed will soon start cutting interest rates. Losses in the dollar were limited on better-than-expected U.S. economic reports on Dec personal spending and De pending home sales.
Friday’s U.S. economic news was mainly better-than-expected and bullish for the dollar. U.S. Dec personal spending rose +0.7% m/m, stronger than expectations of +0.5% m/m, and Nov was revised higher to up +0.4% m/m from +0.2% m/m. Also, Dec pending home sales rose +8.3% m/m, stronger than expectations of +2.0% m/m and the largest increase in 3-1/2 years. On the dovish side, the Dec PCE core deflator, the Fed’s preferred measure of inflation, eased to +2.9% y/y from +3.2% y/y in Nov, better than expectations of +3.0% y/y and the slowest pace of increase in 2-3/4 years.
The markets are discounting the chances for a -25 bp rate cut at 3% for the next FOMC meeting on Jan 30-31 and a 48% chance for that -25 bp rate cut for the following meeting on March 19-20.
EUR/USD (^EURUSD) on Friday rose by +0.13%. On Friday, the euro recovered from a 6-week low and posted modest gains. Short covering in the euro emerged on hawkish comments from ECB Governing Council member Kazaks, who said the gravest error the ECB could make would be a premature easing that allows inflation to bounce back. EUR/USD on Friday initially fell to a 6-week low after German Feb GfK consumer confidence unexpectedly fell to an 11-month low.
ECB Governing Council member Kazaks said while interest rates “should start to go down,” barring any major shocks, the gravest error the ECB could make would be a premature easing that allows inflation to bounce back.
Eurozone Dec M3 money supply unexpectedly rose +0.1% y/y, stronger than expectations of -0.7% y/y and the first increase in six months.
German Feb GfK consumer confidence unexpectedly fell -4.3 to an 11-month low of -29.7, weaker than expectations of an increase to -24.6.
Swaps are pricing in the chances for a -25 bp rate cut by the ECB at 18% for its next meeting on March 7 and 87% for the following meeting on April 11.
USD/JPY (^USDJPY) on Friday rose by +0.27%. The yen on Friday fell moderately on signs of easing price pressures that are dovish for BOJ policy after Tokyo Jan CPI rose at the slowest pace in 22 months. Higher T-note yields Friday also weighed on the yen.
Tokyo Jan CPI eased to +1.6% y/y from +2.4% y/y in Dec, weaker than expectations of +2.0% y/y and the slowest pace of increase in 22 months.
The Japan Nov leading index CI was revised lower by -0.1 to a 3-year low of 107.6 from the previously reported 107.7.
Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 34% for its next meeting on March 19 and at 70% for the following meeting on April 26.
February gold (GCG4) Friday closed -0.50 (-0.02%), and Mar silver (SIH24) closed -0.055 (-0.24%). Precious metals on Friday closed slightly lower. Higher T-note yields on Friday weighed on precious metals. Also, Friday’s stronger-than-expected U.S. economic reports on Dec personal spending and Dec pending home sales are hawkish for Fed policy and undercut precious metals. Gold is also undercut by the ongoing long liquidation of gold by funds after long gold holdings in ETFs fell to a 4-year low Thursday. Dollar weakness on Friday limited losses in metals. Gold also has support after Friday’s report on the U.S. Dec core PCE deflator, the Fed’s preferred measure of inflation, rose less than expected, which is dovish for Fed policy.
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