Dollar Pauses After Rally, Awaits Inflation Data; Global Currencies React
The US dollar experienced a slight dip on Friday, taking a breather after a week of robust gains, as market participants eagerly await the release of the Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) index. The dollar index, which measures the greenback against a basket of six major currencies, retreated 0.2% to 107.960, following its ascent to a two-year high earlier in the week. Despite the slight pullback, the dollar remains poised for a weekly gain of approximately 1%, fueled by a relatively hawkish outlook for US interest rates following the Federal Reserve’s final policy meeting of the year.
The Federal Reserve’s latest projections signal a potential shift towards a less aggressive easing stance in 2025, with policymakers now anticipating only two rate cuts of 25 basis points each, totaling 50 basis points, compared to the four reductions previously projected in September. This more cautious approach comes as the central bank assesses the trajectory of inflation and economic growth. The upcoming PCE index data for November holds significant weight, as a stronger-than-expected reading could further solidify the Fed’s hawkish stance and potentially lead to even fewer or no rate cuts next year. Market expectations have already adjusted to this hawkish shift, anticipating fewer rate reductions than previously foreseen.
Across the Atlantic, the British pound struggled near a one-month low against the dollar, following a less dovish than anticipated decision by the Bank of England to hold interest rates steady. The 6-3 vote to maintain rates highlighted concerns about the UK’s slowing economy. Adding to the pressure on sterling, disappointing retail sales data for November revealed a weaker-than-expected 0.2% increase, falling short of the 0.5% growth forecast. This subdued consumer spending further underscores the challenges facing the UK economy.
The euro also faced headwinds, remaining close to a one-month low against the strengthened dollar. While German retail sales unexpectedly rose by 0.1% year-on-year in November, defying expectations of a 0.3% decline, the overall outlook for the sector remains challenging. The Ifo Institute reported a slight dip in the business climate index for German retail, reflecting ongoing difficulties faced by businesses. Despite hopes for improved consumer sentiment in 2025, the retail sector anticipates a continued difficult economic environment. The European Central Bank, having already implemented four rate cuts this year, is likely to continue easing monetary policy in 2025 if inflationary pressures subside.
In Asia, the Japanese yen found some support from slightly stronger-than-expected inflation data for November, bolstering the case for an eventual interest rate hike by the Bank of Japan. However, the yen is still reeling from a recent slide to a five-month low against the dollar, triggered by comments from Bank of Japan Governor Kazuo Ueda, suggesting that a rate hike is more likely to occur later in 2025 rather than sooner. Meanwhile, the Chinese yuan continued its ascent against the dollar, reaching its highest level since November 2023. The People’s Bank of China maintained its benchmark loan prime rate, as anticipated, with limited room for further rate cuts due to persistent yuan weakness.
The release of the US PCE inflation data is poised to be a pivotal moment for the dollar and other major currencies. A reading that surpasses expectations could embolden the Federal Reserve’s hawkish stance, potentially leading to a stronger dollar and putting further pressure on currencies like the pound and euro. Conversely, a weaker-than-expected inflation print could trigger a reversal of the dollar’s recent gains and provide some relief to other currencies. Market participants will closely scrutinize this crucial data point to gauge the future direction of monetary policy and its impact on global currency markets. The interplay between central bank policies, economic data, and market sentiment will continue to shape the dynamics of the currency markets in the coming weeks and months.
