The US Dollar (USD) weakened against major currencies on Friday, driven by a combination of softer Federal Reserve (Fed) rate hike expectations and a sharp decline in oil prices. The US Personal Consumption Expenditures (PCE) Price Index, the Fed's preferred inflation gauge, rose 4.1% year-on-year in May, matching market expectations, but the monthly increase of 0.4% came in below the 0.5% consensus forecast, reinforcing the view that inflationary pressures may have peaked or are close to doing so [1][3]. Following this data, the probability of a Fed rate hike at the July meeting dropped to around 29.9%, down from 38.5% a week ago, according to the CME FedWatch tool [1]. The odds of the Fed delivering at least two interest rate hikes this year have also been trimmed to 41.7% from 50.2% a week earlier [2].
The Canadian Dollar (CAD) strengthened as the USD/CAD pair traded lower around 1.4180, down 0.13% at the time of writing, supported by the weaker US Dollar and reduced Fed tightening expectations [1]. However, the Loonie's gains were capped by falling oil prices, with West Texas Intermediate (WTI) crude trading around $69.50, down 2.62% on the day, after a preliminary peace agreement between the US and Iran raised expectations of improved global oil supply [1]. The Bank of Canada (BoC) meeting minutes revealed a cautious stance, with policymakers agreeing to keep monetary policy nimble amid risks from new US trade restrictions and volatile energy prices. Markets now price in only 17 basis points of additional BoC tightening by year-end, down from 60 basis points a month ago [1].
The Indian Rupee (INR) is expected to open higher against the US Dollar on Monday, as the USD has corrected over the last two trading days and oil prices have returned to pre-Middle East war levels following increased energy flows through the Strait of Hormuz after a US-Iran memorandum of understanding [2]. Currencies from economies reliant on oil imports, such as India, tend to perform strongly when oil prices fall sharply [2]. The US Dollar Index (DXY) was 0.25% lower near 101.20, down from its yearly high of 101.80 posted on Wednesday [2].
The Euro (EUR) also rebounded above 1.1400 against the US Dollar, recovering from 13-month lows at 1.1325, supported by the decline in oil prices and a softer USD [3]. Brent crude fell below $73.00, down 9% on the week and more than 30% over the last six weeks, easing pressure on oil-importing Eurozone economies [3]. However, lower crude prices are also reducing the need for further European Central Bank (ECB) tightening, which could limit the Euro's recovery. ECB council members expressed mixed views on future policy, with Isabel Schnabel advocating for more tightening and Emmanuel Mouling suggesting a more positive economic scenario [3]. An ECB survey showed Eurozone consumers expect price pressures to ease to 3.5% over the next 12 months, down from 4.0% previously, but also foresee GDP contracting in the medium term [3].
Despite the recent pullback, US inflation remains well above target, with the PCE Price Index at its highest level in three years, supporting the Fed's hawkish bias [3]. The Michigan Consumer Sentiment Index, due later in the day, is expected to provide further insight into US consumer confidence [3].
CONCLUSION
A combination of softer Fed rate hike expectations and sharply lower oil prices has weakened the US Dollar against major currencies, benefiting the Canadian Dollar, Indian Rupee, and Euro. However, the outlook remains cautious, with central banks signaling mixed policy directions and inflationary pressures still elevated. Market participants are closely watching upcoming data and central bank communications for further guidance.