The euro slipped 0.02% against the dollar on Friday after hotter-than-expected US inflation data pushed the odds of a Federal Reserve rate hike next week to 90%. The dollar finished mixed overall, gaining against the euro, Swiss franc and Canadian dollar while losing ground to the yen, Australian dollar and New Zealand dollar.
US headline inflation accelerated to 0.4% month-over-month in August, up from 0.1% in July, keeping the annual rate at 3.4%. The euro finished the day essentially flat against the dollar, but the calm masked a report that firmed up the case for a Fed rate hike.
US inflation firms up Fed hike bets
Core CPI, which strips out food and energy, rose 0.3% for the month and 2.4% from a year earlier. Gasoline prices jumped 3.9% in August and accounted for more than a third of the monthly headline increase. The report was not disastrous, but it was not soft enough to remove the case for further tightening.
As a result, Fed funds futures closed the day pricing in a 90% probability of a 25-basis-point rate increase next week. Shorter-term Treasury yields reacted most strongly: the 2-year yield rose 7.8 basis points to 4.6275%, while the 30-year yield was little changed, flattening the curve.
Consumer sentiment adds to the pressure
Consumer confidence weakened alongside the inflation data. The preliminary University of Michigan Consumer Sentiment Index fell to 47.8 in September, down from 51.7 in August and below expectations near 51.0. One-year inflation expectations climbed to 4.6% from 4.0%, while five-year expectations edged up to 3.4% from 3.3%.
Rising inflation expectations matter for the Fed because they can feed into wage demands and pricing behavior over time. That risk kept pressure on the dollar's rate outlook even as consumers grew more cautious about their own finances.
Euro slips as the dollar finishes mixed
Against this backdrop, the euro fell 0.02% versus the dollar on Friday and was down 0.13% for the week. The dollar's moves were not uniform, however: the Japanese yen gained 0.48% against the dollar, making it the strongest major currency of the day, while the Swiss franc lost 0.5% to become the weakest.
The Federal Reserve announces its policy decision on Wednesday, with updated economic projections and a dot plot due alongside the rate decision. The Bank of England follows on Thursday, expected to hold its Bank Rate at 3.75%, with the vote split and guidance watched closely after the UK's own inflation report a day earlier.
Source: investingLive
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