Year over year, the PCE price index climbed 2.5% after rising 2.6% in May, also in line with forecasts by economists polled by Reuters. The Fed closely tracks the PCE price measures for monetary policy, and subsiding inflation pressures could help officials meeting next week gain confidence that inflation is moving toward the U.S. central bank’s 2% target.
Steve Englander, head of G10 FX research at Standard Chartered Bank in New York, said that quarterly PCE data released with Thursday’s surprisingly strong 2.8% growth rate print on last quarter’s GDP prompted mental preparation for a worse monthly read.
Thursday’s number showed PCE prices rising at a 2.9% rate, so the rise reported Friday was more of a relief.
“The number was good enough,” Englander said. “It wasn’t a home run but compared to yesterday markets said ‘yep nothing to worry about here, it doesn’t really derail September and they weren’t going to cut in July anyway. So life goes on.'”
Meanwhile, the yen has dominated currency markets this month after surging to a near three-month high of 151.945 per dollar on Thursday. It started the month at a 38-year low of 161.96 before Bank of Japan currency intervention and expectations that the Bank of Japan would deliver a hawkish policy tweak at its meeting next week flushed out yen carry-trade shorts.
The Bank of Japan, on the other hand, may raise rates next week, with markets pricing in a 64% chance of a 10 bps hike.
“What you’re seeing is Japanese investors and foreign investors leaving the Japanese market and investing in global tech, predominantly. So unless whatever the BOJ does persuades (investors) to come back into the Japanese asset market, it’s very hard to make the case that the yen is in the midst of a turning point for now,” he said.
The dollar/yen was little changed at 153.76. The euro was up about 0.2% at $1.0861.
The dollar index, which measures the greenback against a basket of six currencies including the yen and the euro, was near flat.
“The extent to which we’re being shocked by economic data at times is outweighed by markets repositioning based on elections and equity-market performance. Other things are happening that don’t have anything to do with whether GDP is 2.8% or 2.6.%,” Englander said.
Sterling strengthened 0.1% to $1.2869. That price is well below the one-year high of $1.3044 hit last week, with traders pricing a 50% chance of the Bank of England cutting rates when it meets next week. Markets are anticipating 51 bps of cuts this year.
Against the Swiss franc, the dollar strengthened 0.1% to 0.883. The dollar strengthened 0.3% at 7.259 versus the offshore Chinese yuan. The Australian dollar strengthened 0.3% to US$0.656 and kiwi strengthened 0.2% to US$0.5896.
Yields on the U.S. 10-year and two-year note yields, the latter of which typically moves in step with interest-rate expectations, were down after the report.
The Federal Open Market Committee meets July 30 and 31, the same days as the BOJ. It is expected to hold borrowing costs steady but traders continue to bet the Fed will cut at its next meeting in September and see up to two more rate cuts this year.
