US dollar retreats after inflation data

The US dollar (USD) fell on Friday, after data showed inflation rose modestly in December but was trending lower, which should keep the Federal Reserve on track to cut interest rates by the middle of the year.

The dollar, however, was on track to post gains for four straight weeks. The dollar index was last down 0.3% at 103.25 .

Data showed the personal consumption expenditures (PCE) price index increased 0.2% last month after an unrevised 0.1% drop in November. In the 12 months through December, the

PCE price index increased 2.6%, matching November’s unrevised gain. Those numbers were in line with consensus expectations.

The annual inflation rate was under 3% for the third straight month. The Fed tracks the PCE price measure for its 2% inflation target.

“The inflation trajectory is improving, giving the Fed leeway to cut rates this year,” wrote Jeffrey Roach, chief economist, at LPL Financial in emailed comments.

“However, the Fed has further work to do and should not be tempted to declare ‘mission accomplished’. Investors shouldn’t be surprised to see a temporary uptick next month in goods inflation from the disruptions in shipping.”

Currency analysts at MUFG said in a note that U.S. economic data presented a mixed picture for monetary policy, ahead of the Fed’s next policy statement on Jan. 31.
“…the strong end to the year must surely place further doubt on the scope for the Fed to commence its easing cycle by March. But March still remains feasible primarily due to the very favourable inflation data within the GDP report,” the note said.

Post-inflation data, U.S. rate futures market priced in a roughly 47% chance of easing at the March meeting, down from late Thursday’s 51% probability, and the 80% chance factored in two weeks ago, according to LSEG’s rate probability app.

The market is fully pricing in the first rate cut to occur at the May meeting, with a roughly 91% probability, down slightly from late Thursday, which was at 94%. About five rate cuts of 25 basis points each have been priced in this year.

In other currency pairs, the greenback rose 0.1% versus the yen to 147.825 . The dollar, however, was down 0.3 for the week, on pace for its largest weekly decline since Dec. 25.
The euro was up 0.2% at $1.0867 , rebounding from a six-week low hit on Thursday. It’s down 0.6% for the week, the euro’s worst weekly performance since October.