US Dollar Takes a Breather Ahead of PCE Inflation Data
2024.12.20 08:37
- Dollar pulls back, but data corroborate Fed’s hawkish stance.
- Yen bleeding stops after Japan’s CPI data reveal acceleration.
- Wall Street set to open lower on risk of a US government shutdown.
Will The PCE Inflation Data Revive The US Dollar?
The pulled back against most of its major peers on Thursday, with the exceptions being the and the , which suffered losses. However, the yen managed to recover some ground on Friday.
The retreat in the greenback may have been the result of profit-taking following the hawkish cut on Wednesday. After all, Thursday’s data were nothing but supportive of the idea that the Fed may need to proceed more cautiously with rate reductions in 2025.
The final estimate of US for Q3 revealed an upside revision to 3.1% QoQ SAAR from 2.8%, while initial jobless claims for last week dropped by more than expected, both corroborating the notion that the Fed could take the sidelines in January and wait before cutting interest rates again.
With the Fed’s new dot plot pointing to only two quarter-point reductions next year and the projections being revised upwards, market participants are likely to turn their attention to the price data for November today. Both the headline and core indices are expected to have accelerated, which will add more credence to Wednesday’s Fed decision and thereby allow the US dollar to resume its prevailing uptrend.
Japan’s CPI Inflation Numbers Come To Yen’s Rescue
The yen was Thursday’s main loser, coming under pressure after the BoJ kept interest rates unchanged, accompanying its decision with a dovish flavor. Governor Ueda said that they need more information to hike interest rates again, placing emphasis on the spring wage negotiations and the uncertainty surrounding US president-elect Trump’s economic policies.
That said, the yen recovered some ground today after Japan’s CPI data revealed that accelerated strongly last month, prompting investors to assign a nearly 50% probability for a 25bps hike in January, and a stronger 80% chance for that happening by March.
Pound Suffers After BoE’s Dovish Hold
The pound was the second worse performer yesterday, also feeling the heat of a dovish hold. The BoE decided to hold interest rates steady as was widely expected, but what came as a surprise was that three members voted for a rate cut when economists in a Reuters poll were expecting only one dissenter.
The decision comes on the heels of the latest weak UK GDP data, but with inflation accelerating again in November, investors are not expecting the Bank to deviate from its cautious stance. According to UK Overnight Index Swaps, they are still penciling in around two quarter-point reductions for 2025.
Stock Futures Fall As US Government Shutdown Nears
In the equity world, all three of Wall Street’s main indices finished their session close to their opening levels, taking a breather after the tumble triggered by the Fed decision. However, the futures market is pointing to a lower open, perhaps as a spending bill backed by Donald Trump was defied by several Republicans, allowing it to fail in the House of Representatives and leaving Congress hanging with no clear plan to avert a government shutdown tonight.
If lawmakers fail to extend the deadline, the US government will begin a partial shutdown that could cut off paychecks for more than 2 million federal workers. With that in mind and should today’s PCE price data corroborate expectations of further stickiness in US inflation, investors may continue to reduce their risk exposure.
Having said all that though, it is still too early to start arguing about a major bearish reversal in equity markets. Past US government shutdowns had limited impact on financial markets, while the Fed’s rate trajectory remains to the downside, despite expectations of a slower reduction pace. This, combined with projections of accelerating earnings growth for US firms and massive corporate tax cuts by President Trump, may allow investors to take advantage of the correction and buy at more attractive levels.
