The dollar index has reached a near five-month low as data reveals that annual U.S. inflation has continued to slow, falling below 3% in November. This data solidifies market expectations for a U.S. interest rate cut in the coming months. The personal consumption expenditures (PCE) price index, which measures inflation, indicates that inflation stood at 2.6% in the 12 months leading up to November, down from 2.9% in October. Meanwhile, the core PCE price index, excluding the volatile food and energy components, rose 3.2% year-on-year in November, marking the smallest rise since April 2021. The Federal Reserve, which uses the PCE price measures as its inflation target, may consider this data as a sign that its efforts to control inflation have been successful, potentially reinforcing its recent commitment to an easier monetary stance.
Market Reaction to Inflation Data
The prospect of a U.S. interest rate cut has led to selling pressure on the dollar since the Federal Reserve meeting last week. Traders have already begun to anticipate several rate cuts in 2024, with the possibility of the first cut occurring as early as March. However, U.S. Federal Reserve officials have now pushed back on the idea of rapid rate cuts next year. As a result, the dollar index has declined by 0.08% to 101.7, hitting its lowest level since late July. If this trend continues, the dollar could finish the year down approximately 2%. Despite this decline, the relative strength of the U.S. economy could potentially limit the ongoing depreciation of the dollar.
The Federal Reserve’s recent dovish policy shift has fueled expectations for the dollar to continue weakening into 2024. By making an early move towards interest rate cuts, the Federal Reserve has created an interest rate differential that works against the dollar. According to Chief Macro Economist Stuart Cole from Equiti Capital, the Federal Reserve has now become the leading central bank in terms of delivering the first interest rate cut, further exposing the dollar to this developing interest rate differential. Nevertheless, the dollar’s decline may be restrained by the strength exhibited by the U.S. economy.
The European Central Bank (ECB) will likely require more time before reassessing its policy outlook. ECB policymaker Bostjan Vasle has suggested that the ECB will need until spring to evaluate its policy before considering an interest rate cut in March or April. In the meantime, market expectations for an imminent interest rate cut may be premature. The euro, consequently, remains relatively stable, experiencing only a minor increase of 0.02% in light of this information.
Sterling has seen a slight gain of 0.09% against the dollar, largely impacted by two factors. Firstly, British retail sales experienced a significant surge in November, surpassing expectations. However, third-quarter GDP figures were revised downward, tempering some of the positive sentiment. It remains to be seen how these contrasting data points will influence the trajectory of sterling in the coming months.
The dollar has strengthened slightly against the yen, rising by 0.25% to 142.465 yen. The yen’s depreciation follows news that core inflation in Japan has significantly slowed down in November, highlighting easing cost-push pressures. The Bank of Japan (BOJ) has maintained its ultra-loose policy settings and has provided little indication of when it might move away from negative interest rates.
Both the Australian and New Zealand dollars have made gains against the dollar. The Australian dollar increased to its highest level since July, reaching $0.6825, before settling at $0.68, representing a 0.04% increase. Similarly, the New Zealand dollar traded 0.07% higher at $0.62985, its highest level in five months. This positive momentum could potentially be attributed to a series of filings for spot bitcoin and ether exchange-traded funds (ETFs), including those from traditional finance industry leaders. These filings have contributed to the revival of the cryptocurrency market after multiple downturns in 2022.
Bitcoin, the most prominent cryptocurrency, has slipped slightly by 0.34% to $43,726. However, this decline comes after the cryptocurrency recently reached an eight-month high of $44,729. The ability of traditional finance heavyweights to file for spot bitcoin and ether ETFs has been a driving force behind the resurgence of the crypto market. As the market continues to evolve, the impact of cryptocurrencies on the broader financial landscape remains a topic of great interest.
As U.S. inflation slows and market expectations of a U.S. interest rate cut continue to solidify, the dollar has weakened to a near five-month low. The Federal Reserve’s recent dovish pivot has made it the frontrunner among major central banks in terms of delivering the first interest rate cut. While the strength of the U.S. economy may temper the dollar’s decline, market sentiment remains uncertain. Additionally, developments in the European Central Bank’s policy outlook, British retail sales, BOJ policy, and cryptocurrency market conditions will continue to influence the foreign exchange market in the coming months