The US dollar was set to end a three-session winning streak on Thursday after a series of economic reports slightly reduced expectations for Federal Reserve interest rate increases this year.
Fresh inflation, consumer spending, GDP and jobless claims data gave investors a mixed picture of the US economy. Although inflation remained elevated, the figures largely matched forecasts and eased some concerns about a more aggressive Fed response.
PCE Inflation Reaches Highest Level Since 2023
The Personal Consumption Expenditures price index increased by 4.1% in the 12 months through May, according to the Commerce Department.
This marked the largest annual increase and the first reading above 4% since April 2023. However, the result matched economists’ expectations.
On a monthly basis, the PCE index rose by 0.4%. Analysts had forecast a slightly stronger increase of 0.5%.
Because the PCE index is the Federal Reserve’s preferred inflation measure, investors closely monitor the report for clues about future monetary policy.
Consumer Spending Remains Resilient
Despite higher inflation, US consumer spending continued to grow.
Personal consumption increased by 0.7% in May, accelerating from 0.4% in April. The result also exceeded the market forecast of 0.6%.
Brian Jacobsen, chief economist at Annex Wealth Management, suggested that the worst period of inflation pressure and consumer anxiety may have passed.
He also noted that household inflation expectations are often more closely connected to gasoline prices than to the cost of technology components. Therefore, falling fuel prices could help improve consumer sentiment.
Dollar Index Pulls Back
The US Dollar Index, which tracks the greenback against a basket of major currencies, declined by 0.18% to 101.43.
Meanwhile, the euro gained 0.08% to trade near $1.1366.
The dollar had advanced during the previous three sessions and in five of the past six trading days. Growing expectations for Federal Reserve rate increases had pushed the currency to a 13-month high on Wednesday.
Strong Dollar Pressures Gold and Bitcoin
The recent rise in the dollar placed significant pressure on several major assets.
Gold briefly fell below $4,000 per ounce for the first time in more than seven months.
Bitcoin also dropped under $60,000, reaching that level for the first time since 2024.
A stronger dollar can weigh on dollar-denominated assets because it makes them more expensive for international buyers.
Fed Rate Hike Expectations Ease
Financial markets slightly reduced their expectations for Federal Reserve interest rate increases following the latest economic reports.
Traders were pricing in an approximately 30% probability of an increase of at least 25 basis points at the Fed’s July meeting. That was down from 34.2% during the previous session.
The probability of a September rate increase fell to 62.1%, compared with 65.7% on Wednesday.
Although inflation remains high, the largely expected PCE figures reduced pressure on the Fed to tighten policy immediately.
US GDP Revised Sharply Higher
Separate Commerce Department data showed that the US economy expanded faster than previously estimated during the first quarter.
Gross domestic product increased at an annualized rate of 2.1%, up from the earlier estimate of 1.6%.
However, consumer spending growth was revised sharply lower to 0.5% from the previously reported 1.4%.
The figures suggest that headline economic growth was stronger than initially calculated, while underlying household demand remained weak.
Weekly Jobless Claims Decline
Labor Department data also showed that initial unemployment claims fell by 12,000 to a seasonally adjusted 215,000.
Economists had expected 225,000 applications.
The lower-than-expected figure pointed to continued resilience in the US labor market, despite cautious hiring conditions across several industries.
British Pound Recovers
The British pound strengthened by 0.23% to $1.3194.
Sterling was on course to end two consecutive sessions of declines following the resignation of Prime Minister Keir Starmer on Monday.
Investors continued to assess the potential political and economic consequences of the leadership change.
Dollar Holds Near Multi-Decade High Against Yen
Against the Japanese yen, the dollar edged 0.01% higher to 161.79.
A move above 161.96 would push the yen to its weakest level against the dollar since 1986.
The yen remains under pressure because of the wide gap between US and Japanese interest rates.
Bank of Japan Faces Policy Pressure
Bank of Japan board member Naoki Tamura said the central bank should raise interest rates once every few months and remain prepared to accelerate the pace if necessary.
His comments highlighted growing concern about inflation risks linked to the Middle East conflict.
However, Japan’s government appears to prefer monetary policy that supports private-sector demand and keeps borrowing costs relatively low.
This could create tension between the government’s economic priorities and the Bank of Japan’s efforts to control inflation.
Societe Generale analysts said markets may initially look beyond the latest policy announcement. However, they warned that fiscal risks have only been delayed and could become a more important issue over time.
