Dollar Softens into the Weekend after U.S. PCE Undershoot

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The Dollar was softer after a key measure of U.S. inflation undershot expectations, keeping alive expectations that the Federal Reserve will cut interest rates later this year.

The U.S. core PCE price index rose 0.2% month-on-month in April, down from 0.3% in the previous two months. The measure of services inflation eased from 0.4% to 0.3%.

The PCE price index is touted by analysts as being the Federal Reserve's favoured gauge of inflation.

The Pound to Dollar exchange rate recovered from lows near 1.27 to quote at 1.2750 at the time of writing. The Euro to Dollar exchange rate is registering a 0.45% gain for the day as it reaches 1.0880.

"U.S. inflation is moving in the right direction now at the very least. The cooling in services is the sign that the Fed really wants to see, although policymakers are definitely not out of the woods yet and I would caution against overinterpreting a single month’s data. Powell is likely to retain his optimistic view about the eventual cooperation in the data in the June meeting," says Kyle Chapman, FX Markets Analyst at Ballinger Group.

Michael Brown, Senior Research Strategist at Pepperstone, says this is the slowest monthly reading from the PCE series for 2024, but caution remains the watchword.

"As one swallow doesn’t make a summer, one promising PCE print shan’t provide policymakers with the requisite 'confidence' that they continue to seek in order to deliver the first rate cut, which remains likely in early autumn," he says.

The Dollar remains near the top of 2024's performance board thanks to a significant reduction in expectations for interest rate cuts in 2024.

Moving into June, expectations are already set low with just one hike fully priced for the year. If this month's data puts this in doubt and the date of the first cut retreats into 2025, expect further Dollar strength.

However, with expectations having already receded significantly since January, it might prove more difficult for the market to become more 'hawkish' about Fed policy. This could limit the Dollar's rebound potential, particularly given the clear signs of improvement in the global economy that are supporting other currencies.

Last week, the UK posted an above-consensus inflation print and subsequent survey data point to a firming economic recovery that lessens the need for Bank of England rate cuts.

Eurozone data is also firming, and Friday's surprisingly firm inflation data significantly lessens the chance that the European Central Bank will follow next week's interest rate cut with another cut in July. In fact, markets are only confident that one additional cut in 2024 is likely.

The Dollar's strong run relied on dire data being printed elsewhere, but the backdrop is changing and hints that the going will be tougher from here on.