* U.S. PCE index up 0.2% in December
* Annual inflation gain under 3% for 3rd straight month
* Dollar/yen on track for largest weekly decline since
December
* Euro/dollar on pace for biggest weekly loss since October
* Rate futures fully price in Fed cut in May
NEW YORK, Jan 26 (Reuters) – The U.S. dollar inched
lower on Friday, after data showed inflation rose modestly in
December but was trending lower, which should keep the Federal
Reserve on track to cut interest rates by the middle of the
year.
Volume faded in the afternoon ahead of the weekend and as
investors braced next week for a slew of important U.S. economic
data such as non-farm payrolls for January and key events led by
the Federal Open Market Committee meeting and the Treasury’s
refunding announcement. The latter will outline the U.S.
government’s borrowing requirements for the upcoming quarter.
On the week, the greenback was on track to post gains for
four straight weeks. The dollar index was last down 0.1% at
103.41.
Data showed the personal consumption expenditures (PCE)
price index increased 0.2% last month after an unrevised 0.1%
drop in November. In the 12 months through December, the PCE
price index increased 2.6%, matching November’s unrevised gain.
Those numbers were in line with consensus expectations.
The annual inflation rate was under 3% for the third
straight month. The Fed tracks the PCE price measure for its 2%
inflation target.
“We continue to see pieces of data that suggest at this
moment the market shouldn’t be concerned about rising inflation
in any signficant and immediate capacity,” said Jeff
Klingelhofer, co-head of investments at Thornburg Investment
Management in Santa Fe, New Mexico.
“That takes further tightening off the table because
what the Fed has acknowledged a number of times and continued to
point to is that as inflation falls and as their policy rate
doesn’t move, then the tightness of monetary policy actually
increases,” he added.
Currency analysts at MUFG said in a note that U.S. economic
data presented a mixed picture for monetary policy, ahead of the
Fed’s next policy statement on Jan. 31.
“…the strong end to the year must surely place further
doubt on the scope for the Fed to commence its easing cycle by
March. But March still remains feasible primarily due to the
very favourable inflation data within the GDP report,” the note
said.
Post-inflation data, U.S. rate futures market priced in a
roughly 47% chance of easing at the March meeting, down from
late Thursday’s 51% probability, and the 80% chance factored in
two weeks ago, according to LSEG’s rate probability app.
The market is fully pricing in the first rate cut to occur
at the May meeting, with a roughly 90% probability, down
slightly from late Thursday, which was at 94%. About five rate
cuts of 25 basis points each have been priced in this year.
Jonathan Petersen, senior markets economist at Capital
Economics wrote in a research note that despite recent solid
economic data, growing disinflationary pressures have kept a lid
on Treasury yields and the dollar.
Much like the Fed, he noted that other central banks
such as the European Central Bank, have pushed back against
market expectations of rates cuts in the next couple of months.
“Against this backdrop, our view remains that there
isn’t a lot of scope for a much stronger dollar over the coming
quarters,” Petersen said.
In other currency pairs, the greenback rose 0.3% versus the
yen to 148.06. The dollar, however, was down 0.3 for
the week, on pace for its largest weekly decline since Dec. 25.
The euro was up 0.1% at $1.0856, rebounding from a
six-week low hit earlier in the session after a survey showed
weaker-than-expected German consumer sentiment.
ECB policymaker Martins Kazaks also said on Friday the
central bank was on the right path to lower inflation but
patience was required before policy can be reversed.
The euro was down 0.7% for the week, its worst weekly
performance since October.
Sterling was last slightly down against the dollar
at $1.2702, ahead of a Bank of England decision on interest
rates next Thursday.
(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting
Iain Withers in London, Editing by Chizu Nomiyama, Mark Potter
and Diane Craft)
