Dollar Rebounds After Inflation Data Eases Rate Hike Fears; Euro Dips on Dovish Lagarde Comments
The US dollar regained some ground on Monday, recovering from a sharp decline at the end of last week triggered by cooling inflationary pressures. The Dollar Index, a measure of the greenback’s value against a basket of six other currencies, climbed 0.4% to 107.750, bouncing back from Friday’s significant drop. This retreat had been fueled by the Personal Consumption Expenditures (PCE) price index data, the Federal Reserve’s preferred inflation gauge, which revealed a moderation in price increases. The core PCE, excluding volatile food and energy prices, registered its smallest gain in six months, alleviating concerns about aggressive future interest rate hikes by the Federal Reserve.
Friday’s PCE data significantly impacted market expectations regarding the potential for interest rate cuts in 2025. Prior to the data release, a more hawkish outlook on US interest rates, following the Federal Reserve’s last policy meeting of the year, had led to increased speculation about potential rate cuts. However, the softer inflation data tempered these expectations, with markets now pricing in 38 basis points of rate cuts next year, less than the two 25 basis-point cuts projected by the Fed last week. The anticipated timing of the first rate cut in 2025 has also been pushed back, from March to June.
In Europe, the euro weakened against the dollar, slipping 0.1% to 1.0414, approaching a two-year low. The decline was influenced by comments from European Central Bank (ECB) President Christine Lagarde, who stated that the eurozone was "very close" to achieving its medium-term inflation target of 2%. Lagarde’s dovish remarks suggested that the ECB may be nearing the end of its rate-hiking cycle, putting downward pressure on the euro. Earlier in December, Lagarde had indicated that the ECB would consider further rate cuts if inflation continued its descent towards the 2% target, as further growth suppression would no longer be necessary. The ECB recently implemented its fourth interest rate cut of the year and may further reduce rates in 2025 if inflation concerns subside.
Across the Atlantic, the British pound remained relatively stable at 1.2571, following the release of disappointing economic data. The UK economy stagnated in the third quarter, with the Office for National Statistics (ONS) revising its growth estimate for the July-to-September period down to 0.0% from a previous estimate of 0.1% growth. The ONS also lowered its growth estimate for the second quarter to 0.4% from 0.5%. This economic slowdown has complicated the Bank of England’s policy decisions. Last week, policymakers voted 6-3 to maintain interest rates, a wider split than anticipated, reflecting concerns about the weakening economy.
In Asian markets, the Japanese yen strengthened against the dollar, rising 0.2% to 156.72. This followed the Bank of Japan’s (BOJ) dovish signals last week, indicating that it was not contemplating interest rate hikes in the near term, despite a recent uptick in inflation. The BOJ suggested that it might not raise rates until as late as March 2025. Meanwhile, the Chinese yuan also appreciated against the dollar, climbing 0.2% to 7.3080, reaching a one-year high. This rise came amid ongoing concerns about China’s economic outlook, despite expectations that Beijing will increase fiscal spending next year to bolster the economy. However, the anticipated easing of monetary conditions is expected to weigh on the yuan.
As the year draws to a close, trading volumes are expected to thin out, particularly with the shortened trading week due to the holiday season. This reduced liquidity can exacerbate market movements, making currencies more susceptible to fluctuations based on news and sentiment. The focus will likely remain on central bank policies and economic data releases as investors assess the outlook for global growth and inflation in the coming year. The divergence in monetary policy between the US Federal Reserve and other central banks, particularly the ECB and BOJ, is likely to continue influencing currency markets in the near term. Furthermore, the ongoing economic slowdown in the UK and concerns about China’s recovery will also be key factors to watch in the currency markets.
