Expectations of interest rate cuts by US Federal Reserve increase

16 May 2024 , 08:55 AM

Thursday saw the dollar plunge to multi-month lows as retail sales stagnated and U.S. core inflation reached its lowest level in three years. This has increased expectations of interest rate cuts by US Federal Reserve.

Following the announcement of the data, gains were led by stocks and other risk-sensitive assets like the Australian dollar. The Australian dollar saw its biggest one-day increase of the year, rising 1% over night. It then added 0.1% more in early trade in Asia to reach a four-month high of $0.67.

The euro rose 0.6% over night and crept up to $1.0890, its highest level in two months. At $0.6131, the New Zealand dollar reached a two-month high. Sterling reached a peak of one month at ₹1.2694.

After receiving a reprieve, the battered yen traded at 154.25, its best level against the dollar, for a week.

According to data released on Wednesday, core U.S. inflation decreased to an annualized 3.6% in April, which was predicted by the market. Although it is significantly higher than the Federal Reserve’s target of 2%, investors regarded it as paving the way for a rate cut as early as September, or possibly even sooner given the upcoming November U.S. presidential election, since it decreased from 3.8% a month earlier.

The recent surge in confidence in rate cuts was strengthened by weaker-than-expected retail sales data, which were flat last month as opposed to the 0.4% increase that experts had predicted.

Due to the data-driven rally in Treasuries and the selling of Japanese bonds, the difference in 10 year rates between the US and Japan has shrunk by over 20 basis points this week.

The Australian dollar has somewhat retreated from an 11-year high against the yen as the yen also rose from recent cross-rate troughs.

With data released earlier in the day indicating that the Japanese economy shrank more than anticipated in the first quarter, the yen’s outlook is still uncertain. This will make it more difficult for authorities to boost interest rates from near-zero levels.

The day ahead is highlighted by speeches from European Central Bank governors, Australian jobs statistics, and U.S. initial jobless claims.

Overnight, the U.S. dollar index fell 0.75% and through its 200-day moving average, marking the most percentage decline in a single day this year. Tuesday’s early Asian trading saw it at 104.17, the lowest level in five weeks.

In foreign exchange, the Chinese yuan appreciated somewhat to 7.2081 per US dollar. Bitcoin reached a three-week high of $66,695 after regaining support above its 100-day moving average.

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