Key Takeaways
- U.S. inflation continues to ease, with the dollar index falling for the fourth straight week.
- The yen surged nearly 2% after Shigeru Ishiba, a monetary policy hawk, was confirmed as Japan’s next prime minister.
- Cooling inflation fuels market expectations for further Fed rate cuts, with a 50 bps cut increasingly likely in November.
The U.S. dollar slipped on Friday after fresh data indicated that U.S. inflation is continuing to cool, while the Japanese yen strengthened sharply on news of a potential change in Japan’s leadership, raising expectations for a shift in monetary policy.
The U.S. personal consumption expenditures (PCE) price index—a key gauge of inflation—rose 0.1% in August, in line with economists’ forecasts, following a 0.2% increase in July. Over the past year, the index climbed 2.2%, down from July’s annual gain of 2.5%, suggesting inflationary pressures in the world’s largest economy are gradually easing.
Read More: Backtesting Algorithmic Trading Strategies Isn’t Enough: Here’s Why
Consumer spending, which makes up more than two-thirds of U.S. economic activity, edged up by 0.2% in August, down from a 0.5% rise in July. While slightly below estimates of a 0.3% increase, the data indicates that U.S. economic growth remains steady heading into the third quarter.
The Federal Reserve, which recently pivoted its focus toward maintaining a healthy labor market, delivered an aggressive 50 basis point (bps) rate cut last week. Fed Chair Jerome Powell is likely encouraged by the inflation data, with analysts noting that it supports the central bank’s decision to cut rates more sharply.
The dollar index, which measures the greenback against a basket of six major currencies, dropped 0.17% to 100.43, continuing its downward trend for the fourth consecutive week. The dollar is now on track for its ninth weekly decline in the past 10 weeks.
Meanwhile, the Japanese yen surged nearly 2% against the dollar after Shigeru Ishiba, seen as a monetary policy hawk, was confirmed to become Japan’s next prime minister. Ishiba’s win sparked expectations that the Bank of Japan could pursue a tighter monetary policy, pushing the yen to its strongest level since early August.
In Europe, the euro was down 0.14% at $1.116, as lower-than-expected inflation data from France and Spain heightened expectations for a European Central Bank rate cut in October.
