Dollar Index Falls Despite Setting New Two-Year High
PCE Report Clouds Future Fed Policies
The dollar index (DXY00) hit a new two-year high on Friday but ended the day down 0.72%. The drop was influenced by the US PCE deflator report, which hinted at a more dovish approach from the Federal Reserve. This prompted weaker US interest rate differentials, as the 10-year T-note yield fell by 4 basis points. Compounding the issue, personal spending and consumer sentiment reports fell short of expectations.
Political Uncertainty Adds Pressure
Political uncertainty weighed on the dollar as the US government risked a shutdown if Congress did not pass a stop-gap spending bill by midnight on Friday.
PCE Price Index Reveals Sluggish Growth
Friday’s PCE price index data showed weaker-than-expected growth, potentially giving the Federal Open Market Committee (FOMC) more room to consider rate cuts. The November PCE price index rose by 0.1% month-over-month and 2.4% year-over-year, falling short of expectations of 0.2% and 2.5%, respectively. Similarly, the core PCE price index also grew by 0.1% month-over-month and 2.8% year-over-year, below predictions of 0.2% and 2.9%.
Yearly Trends Persist Above Fed’s Target
The overall PCE price index increased from October’s year-over-year rate of 2.3%. Both indices remain above the Fed’s inflation target of 2.0%. Earlier this year, the indices hit lows of 2.1% for nominal and 2.6% for core, demonstrating a challenging outlook for inflation control.
Pockets of Weakness in Income and Spending
November’s personal income grew by 0.3% month-over-month, slightly below the consensus estimate of 0.4%. However, October’s figure was revised up to 0.7% from 0.6%. Notably, November personal spending rose by 0.4%, also falling short of the 0.5% expectation, while the previous month was adjusted down to 0.3% from 0.4%.
Consumer Sentiment Holds Steady
The University of Michigan’s final December consumer sentiment index remained unchanged at an 8-month high of 74.0, slightly weaker than the predicted revision to 74.2. The consumer index has increased for five consecutive months, reflecting gradual improvements in household sentiment.
Market Expectations for Future Rate Cuts
Currently, the markets predict only a 9% chance of a 25 basis point rate cut at the FOMC meeting scheduled for January 28-29.
Euro Sees Gains Amid Dollar’s Decline
On Friday, EUR/USD (^EURUSD) rose by 0.78% as the euro gained ground following the dollar’s slide in response to the PCE inflation report. The German November PPI report indicated a 0.5% month-over-month increase and 0.1% year-over-year, surpassing expectations. Meanwhile, French PPI also improved, with November figures showing a 3.2% month-over-month rise and a 5.2% year-over-year decline, compared to the prior month.
Rate Cut Predictions Emerge for the ECB
Swaps indicate a 100% probability of a 25 basis point rate cut by the European Central Bank (ECB) at their January 30 meeting, with a 13% chance of a deeper 50 basis point cut.
Yen Rebounds Post BOJ Announcement
USD/JPY (^USDJPY) slipped by 0.88% as the yen gained traction after a sharp decline the previous day. The Bank of Japan (BOJ) maintained its overnight call rate at 0.25%, with Governor Ueda indicating no immediate need to change rates. Ueda noted the necessity of broader wage assessments, suggesting further evaluation may extend until March or April.
Precious Metals Escape Recent Sell-Off
February gold (GCG25) closed at $37.00 higher, up 1.42%, and March silver (SIH25) rose by $0.547, an increase of 1.86%. Both metals recovered some losses from Thursday, supported by the dovish PCE report and lower T-note yields. Additionally, safe-haven demand surged amid rising geopolitical risks stemming from the Syrian government’s instability and escalating tensions in the Ukraine-Russia conflict.
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information, please view the Barchart Disclosure Policy here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
