US PCE drop boosts optimism on rates
Financial markets finished last week on a strong note after the US PCE inflation number came in below expectations and boosted hopes that central banks were winning the war on inflation.
The US personal consumption and expenditure reading (PCE) – the Federal Reserve’s preferred measure of inflation – saw the headline annualised number fall from 4.4% in April to 3.8% in May. The core number fell less, from 4.7% to 4.6%.
The news saw market expectations for further Federal Reserve rate hikes ease with US bond yields lower and the benchmark S&P 500 closing at new 15-month highs.
Aussie rebounds from lows
The US dollar eased as markets turned more optimistic.
The Australian dollar was higher as it rebounded from key support around 0.6600.
The AUD/USD gained 0.8%. The Aussie was higher in most other markets.
The NZ dollar was also stronger with the NZD/USD up 0.9%. The kiwi also gained in other markets. The USD/SGD fell 0.3% while the USD/CNH was flat
Central banks still key for FX
The US dollar’s losses at the end of last week continues to illustrate how short-term interest rate expectations remain the major driver of FX moves.
While markets expect the Fed to hike rates on two more occasions, over the medium term, the Fed is seen as more likely to cut.
On the other hand, the British pound has been supported with further hikes expected and higher rates seen over a longer period.
This week, the Reserve Bank of Australia meets on Tuesday, while US job numbers, due later in the week, will also impact on expectations around the Fed.
Global growth remains critical also, with Chinese purchasing manager indexes due on Monday and Wednesday. China has recently struggled to maintain growth as it emerged from its 2022 pandemic lockdowns.
Aussie, kiwi rebound from key support
Table: seven-day rolling currency trends and trading ranges
Key global risk events
Calendar: 3 – 7 July
All times AEST
Have a question? [email protected]
*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
