The release of the US Personal Consumption Expenditures (PCE) Price Index inflation data has softened expectations for US Federal Reserve rate hikes, impacting both the USD/CAD and GBP/USD currency pairs during early European trading hours on Friday [1][2]. The USD/CAD pair declined to around 1.4190, with the US Dollar weakening against the Canadian Dollar as the headline PCE surged 4.1% year-on-year in May, marking the first reading above 4.0% since April 2023, but matching market expectations. On a monthly basis, PCE increased 0.4%, below the consensus of 0.5% [1]. Similarly, the GBP/USD pair traded with mild gains near 1.3200, as the British Pound strengthened against the US Dollar amid the same inflation data and political developments in the UK [2].
The core PCE, the Fed’s preferred inflation gauge, rose 3.4% year-on-year in May, versus 3.3% prior, in line with expectations and registering the highest since October 2023 [2]. Financial markets have priced in nearly a 28.9% probability that the Fed will raise rates at the July meeting, down from 34.2% in the prior session, according to the CME FedWatch tool [1][2]. For the September meeting, expectations for a hike dipped to 60.1% from 65.7% on Wednesday [2].
Analysts believe that with oil prices falling to pre-war levels after the US and Iran signed a preliminary peace deal, inflation likely peaked last month or is close to doing so [1][2]. In Canada, the Bank of Canada (BoC) is expected to hold interest rates at current levels for the remainder of the year, with traders now expecting 17 basis points of tightening by December, down from about 60 basis points last month, according to Reuters [1]. Minutes from the BoC’s policy meeting showed the governing council agreed to keep monetary policy nimble to respond to new US trade restrictions and energy price impacts [1].
In the UK, political developments are also influencing the Pound. Traders are focusing on who might become finance minister under Andy Burnham, the likely successor to Keir Starmer as Prime Minister. Nick Rees, head of macro analysis at Monex Europe, noted that Wes Streeting's emergence as the favorite to become finance minister is likely to support sterling, although he cautioned that economic realities remain challenging [2].
CONCLUSION
US PCE inflation data has eased expectations for imminent US rate hikes, leading to a softer US Dollar against both the Canadian Dollar and British Pound. While central banks in Canada and the UK are expected to maintain current policy stances, political and economic developments continue to influence market sentiment. The overall market takeaway is a moderate improvement in risk sentiment and a reduced likelihood of aggressive US monetary tightening.