The United States dollar started on a weak footing after sliding towards fresh three-year lows last week, despite core personal consumption expenditures (PCE) inflation, the Federal Reserve's preferred price gauge, coming in slightly above expectations.
The combination of sticky inflation and weakening spending figures has intensified speculation over whether the Fed will cut rates in July, even as political pressure mounts from President Donald Trump.
Euro Eases from 2021 Highs as Inflation Surprises
The Euro dropped below 1.17 after briefly touching a multi-year peak above 1.175. Despite expectations of a September rate cut by the Fed, stronger-than-expected U.S. core PCE data and improved consumer sentiment in the U.S. weighed on the Euro.
Meanwhile, Eurozone inflation data was mixed, with both Spain’s HICP and French inflation ticking higher.
ECB policymaker Klaas Knot noted the likelihood of one more rate cut in 2025, though ECB Vice-President Luis De Guindos indicated that inflation is approaching target.
Aussie Pulls Back From Yearly Highs
The Australian dollar also pulled back from its year-to-date (YTD) high of 0.6564, settling near 0.6520 at week’s end.
A temporary lift in risk sentiment driven by the U.S.-China trade agreement and the de-escalation of Middle East tensions buoyed the Aussie.
However, firm U.S. inflation and month-end profit-taking saw gains unwind, especially as the U.S. dollar reclaimed some strength.
Still, the recent ceasefire between Israel and Iran and a stabilised global risk backdrop support the Aussie.
Sterling Slips from Multi-Year Highs as Dollar Firms
The Pound eased to 1.3700 after reaching a near four-year high of 1.3770 last week. The modest pullback comes amid a firming U.S. dollar and May’s stronger-than-expected core PCE print.
Despite limited domestic data in the UK, optimism surrounding US-EU and US-China trade agreements, along with anticipation over the upcoming UK budget, kept Sterling supported.
In the U.S., the University of Michigan (UoM) revealed that consumer sentiment in June improved moderately, with the index rising from 52.2 to 60.7.
Inflation expectations were also revised lower, as households now anticipate prices to rise 5% over the next year, down from 6.6% last month, and 4% over the next five years, down from 4.2%.
Yen Softens as Inflation Slows and Risk-On Mood Prevails
The Japanese Yen edged lower, with the USD/JPY currency pair trading above 144.00 as soft Japanese inflation data and waning risk aversion weighed in.
Japan’s Tokyo core CPI cooled slightly in May, reducing expectations of a near-term rate move from the Bank of Japan.
Trade optimism between the U.S., China, and the EU further curbed demand for safe-haven assets like the Yen, supporting USD/JPY into the new week.
Economic Calendar – Week Ahead
On Monday, markets will digest industrial production data from South Korea and Japan, as well as South Korea's retail sales and Japan’s housing starts.
Australia will release housing and private sector credit data. Meanwhile, China's NBS manufacturing and non-manufacturing PMIs will be closely watched.
In the UK, investors will examine the current account, business investment figures, GDP growth, and data on consumer credit, mortgage approvals, and overall lending.
On Tuesday, attention shifts to central bank communication, with speeches due from Fed officials Bostic and Goolsbee. European Central Bank President Christine Lagarde will also speak, as the ECB’s annual forum kicks off, featuring appearances from Fed Chair Powell, BoE Governor Bailey, and BoJ Governor Ueda.
Japan will release the Tankan large manufacturers index and consumer confidence data, while South Korea publishes trade balance figures. China’s Caixin manufacturing PMI and UK house price data will also be released, alongside Eurozone inflation figures and further ECB commentary.
Wednesday’s focus will turn to the US, with the ISM Manufacturing PMI, JOLTs job openings, and ADP employment change reports all due.
South Korea will publish inflation data, and Australia will release retail sales and building permits figures. The Eurozone's unemployment rate will also be reported.
Thursday will feature key trade data from Australia and the US, including exports and imports. China's Caixin Services PMI will provide insight into the country's post-COVID recovery, while the US will release jobless claims, nonfarm payrolls, and the unemployment rate, providing the last major labour market indicators before the Fed's next meeting.
On Friday, the U.S. will publish factory orders and ISM services PMI, though trading activity will be light due to the Independence Day public holiday. Japan will release household spending data, Australia will update its monthly household spending indicator, and the Eurozone will publish its latest Producer Price Index (PPI).
