The dollar fell broadly on Friday after U.S. inflation data showed signs of easing, fueling expectations of slower Federal Reserve rate cuts in 2024. The Personal Consumption Expenditures (PCE) price index rose just 0.1% in November, below market expectations and down from 0.2% in October. Fed policymakers, including San Francisco Fed President Mary Daly and Chicago Fed President Austan Goolsbee, reiterated the likelihood of gradual easing, with the December rate cut reportedly being a close decision. Treasury yields declined, with the 2s-10s curve flattening by 4 basis points to +20.6bp, further weighing on the dollar.

Equities Rally on Improved Sentiment and Easing Inflation Fears

Equity markets surged, with the S&P 500 gaining 1.4% during a triple-witching session, as improved investor sentiment reflected optimism about moderating inflation and accommodative Fed policies. Congressional Republicans made another attempt to avert a government shutdown, though uncertainty over the outcome tempered gains in risk assets.

Euro Gains on Easing Geopolitical Tensions and Labor Progress

The euro rose 0.75% against the dollar, supported by easing geopolitical tensions and progress in labor negotiations at Volkswagen. Improved risk sentiment bolstered the euro, though underlying eurozone economic challenges remain a limiting factor for further gains.

Pound Rises Despite Weak Retail Sales

Sterling climbed 0.77%, shrugging off weaker-than-expected U.K. retail sales data, as broader market optimism provided support. Markets are focused on signs of potential economic stabilization, with sentiment likely driven by upcoming data releases.

Yen Strengthens on Lower Treasury Yields and Risk-Off Flows

USD/JPY fell 0.84%, reflecting yen strength amid declining U.S. Treasury yields and waning demand for the dollar. The yen’s haven appeal remains intact, supported by signs of moderating global inflation and potential geopolitical risks.

Commodity-Linked Currencies See Mixed Performance Amid Dollar Weakness

• Australian Dollar (AUD/USD): Gained 0.41% on risk-on flows and a weaker dollar, though cross-currency pair AUD/JPY fell 0.40% due to yen resilience.
• Gold: Rose 1.26%, benefiting from dollar weakness and improved macroeconomic sentiment.
• Oil: Climbed 0.5%, supported by President-elect Donald Trump’s call for increased European energy imports.

Market Outlook: Inflation Trends and Central Bank Policies in Focus

• Dollar: Likely to remain under pressure if U.S. inflation data continues to trend lower, bolstering the case for gradual Fed easing.
• Euro: Could see additional gains if geopolitical stability and labor progress in Europe persist, though weak eurozone growth remains a headwind.
• Pound: Hinges on upcoming U.K. economic data, with signs of stabilization potentially supporting further gains.
• Yen: Poised for continued strength if Treasury yields decline further or geopolitical risks resurface.
• Commodity-Linked Currencies: The Australian dollar and peers may stay supported by improved sentiment, though global demand concerns could temper gains.
• Gold and Oil: Positioned to benefit from dollar softness and supportive macroeconomic dynamics, though market sentiment will remain a key driver.

Conclusion

Markets are navigating a delicate balance between cooling inflation, central bank policies, and global growth dynamics. The dollar faces headwinds from declining Treasury yields and dovish Fed expectations, while the euro, pound, and yen capitalize on shifting risk sentiment. Commodity-linked assets, including gold and oil, stand to gain further if dollar weakness and supportive macroeconomic trends persist, though challenges in global demand could temper momentum. Central bank communications and upcoming economic data will remain critical in shaping near-term market trends.