The implied probability of a further hike in US interest rates this year declined on Friday to 35%, down from probabilities above 40% one day earlier. This fairly drastic adjustment in market expectations for US rates occurred following inflation data which, remarkably, came in below market expectations for the fifth consecutive month. The US dollar ended the week lower as a result.
Noteworthy exchange rates include EUR/USD, which is now back above 1.18 and remains close to long-term highs (dollar lows).
USD/JPY fell at one point to a three-month low of 108.72 but recovered slightly to end the week back above 109.
USD/CNY fell to eleven-month lows below 6.65 before recovering to end the week at 6.61.
A broad measure of US dollar performance, the US Dollar Index (DXY), fell by 0.4% on the day to 93.1 and remains within striking distance of August’s low at 92.55 – a fifteen-month low at the time it was made.
CPI Growth Disappoints Again
The Bureau of Labor Statistics said yesterday that the consumer price index (CPI) rose in the month of July by 0.1% on a seasonally adjusted basis. The market consensus prior to the release had been for a print of 0.2%. The number was at least an improvement on June’s non-existent growth (0.0%).
‘Core’ inflation, which excludes the volatile food and energy components of the CPI, also came in at 0.1% and disappointed against expectations for 0.2%. July’s core number was unchanged from that of June.
Yesterday’s data puts annualized headline and core inflation both at 1.7%.
Earlier in the year, it had been expected that signs would emerge that US inflation was heading towards the Fed’s target of 2% – signs that would justify future hikes in the Fed funds rate in order to prevent an inflation overshoot. Concerns must now be for a reversal in this vital measure of economic health.
Will the Fed Hike Once More in 2017?
Prior to yesterday’s release, investors were already skeptical of the Fed’s official interest rate projections, which show one further hike in 2017 and three hikes in 2018. This contrasts with pricing in derivatives markets which continue to imply just one hike in 2018 and, as already stated, a 35% chance of another this year.
In comments to CNBC reporters, MUFG economist Chris Rupkey said following CPI’s release that “the report is just the sort of ammunition the Fed doves need to argue against additional rate hikes this year and even next year.”
“The cooling of inflation this late in the economic cycle calls into question how strong the economy really is,” Rupkey added.
To Bloomberg journalists, Think Markets’ chief analyst Naseem Aslam said “the data doesn’t help the Fed’s situation. It helps the doves who want the Fed to go slow. Traders are now thinking there will be no interest rate hike this year.”
Wells Fargo’s Michael Schumacher believes the Fed may still hike. He described Friday’s data as a “dud” and “one of a string of bad numbers”, but added that monthly inflation around 0.1% was “not a radical departure [from prior figures] that could sway the Fed.”
Inflation/Rates Outlook Remains Key
The US dollar has suffered heavily this year as the outlook for US inflation has taken a turn for the worse.
It was supposed to be a highly inflationary year, given Donald Trump’s pledges entering 2017 for economy boosting policies including tax cuts, deregulation and up to $1 trillion in infrastructure spending – policies that would have necessitated much higher US interest rates.
With concrete plans for the implementation of such policies yet to materialize and with little else applying pressure on consumer prices the dollar has tumbled. The US Dollar Index fell in six of the year’s first seven months and in August remains close to July’s long-term low.
An Opportune Moment for Converting into USD
Those in need of American currency this year, whether for travelling (physical dollars) or in the form of a foreign currency transfer (for dollar payments or remits), should consider getting their hands on some while it remains cheap. Because our trusted FX providers offer better exchange rates than those available at a typical bank or Bureau de Change, readers can best achieve that by using BER’s online comparison calculators for USD foreign currency transfers and USD travel cash.
Compare FX Providers and Banks for: