The U.S. dollar experienced a decline against most major currencies on Friday. This movement came after the release of the U.S. Personal Consumption Expenditures (PCE) inflation data, which did little to alter market expectations that the Federal Reserve (Fed) would lower interest rates by September. There is a prevailing sentiment that the Fed might implement up to three rate cuts by the end of the year.

Upcoming Fed Meeting and Economic Indicators

All eyes are on next week’s Fed meeting, scheduled for Tuesday and Wednesday. While rate futures indicate no expected change in policy, the key focus will be on any signals from policymakers regarding the September Federal Open Market Committee (FOMC) meeting. Additionally, the U.S. non-farm payrolls report, set to be released on Friday, will play a crucial role in shaping future expectations.

In contrast, the outcome of the Bank of Japan (BOJ) meeting next week is less certain. The recent stabilization in yen short positions suggests a temporary calm in the market.

Inflation Data and Market Reactions

Despite core PCE inflation coming in slightly above expectations, the overall year-over-year figure eased as anticipated, while personal income growth fell more than forecasted. The University of Michigan consumer sentiment index saw a slight increase, defying expectations for a flat reading. One-year inflation expectations remained steady at 2.9%, and the five-year outlook inched up to 3.0% from 2.9%.

U.S. Treasury yields fell by 4-6 basis points across various maturities, reflecting market optimism about potential rate cuts.

Stock Market and Commodity Movements

The S&P 500 saw a significant rally of 0.96% by Friday afternoon in New York. This recovery was driven by gains in megacap tech and chip stocks, which had faced substantial losses earlier in the week. The largely in-line inflation readings reinforced hopes for an early rate cut.

However, the commodities market faced a mixed day:

• WTI Crude Oil: Fell 2.02%, influenced by decreasing Chinese demand and hopes for a Gaza ceasefire that might alleviate Middle East tensions and supply concerns.
• Copper: Declined 0.52% and was on track for its third consecutive weekly drop. Concerns lingered over the sustainability of physical buying in China amidst a sluggish economy and lack of significant stimulus.
• Gold: Rallied 0.84%, buoyed by lower U.S. Treasury yields and increased optimism for a September rate cut.

Currency Market Highlights

As the trading day drew to a close, currency movements were as follows:

• EUR/USD: +0.13%
• USD/JPY: -0.12%
• GBP/USD: +0.13%
• AUD/USD: +0.24%
• GBP/JPY: +0.1%
• EUR/JPY: +0.04%
• AUD/JPY: +0.14%