Inflation and PCE Data

The dollar weakened on Friday following the release of the Personal Consumption Expenditures (PCE) data, which indicated that inflation slowed as expected for May. Core PCE inflation decelerated to 0.1% month-over-month and 2.6% year-over-year. The headline monthly rate remained flat, and the annual figure also decreased to 2.6%, matching Reuters' consensus forecasts. Despite this, the report showed stronger-than-expected personal income growth.

Mixed Economic Data

While the PCE data suggested a cooling inflation, other economic indicators painted a mixed picture. The Chicago PMI experienced an unexpectedly robust recovery, and the University of Michigan's consumer sentiment index rose more than forecasted, although inflation expectations declined. Following these reports, U.S. Treasury yields rebounded from their lows. However, the dollar generally lost ground, except against the yen, which hit a multi-decade high of 161.27 during the Asian session.

Market Outlook

The market outlook remains uncertain due to the mixed economic signals. The deceleration in PCE inflation supports the view of gradually cooling inflation, potentially leading to a more dovish stance from the Federal Reserve. Conversely, the strong recovery in the Chicago PMI and rising consumer sentiment indicate underlying economic strength. Future data releases, particularly regarding the Fed's progress in controlling inflation, are expected to influence market movements. Treasury yields are anticipated to stay steady at the front end while increasing at longer maturities. Market participants are closely monitoring comments from Fed officials, with San Francisco Fed President Mary Daly and Fed Governor Michelle Bowman expressing cautious optimism about inflation.

Currency Summary

The dollar's slight retreat was observed against most major currencies. EUR/USD rose by 0.17%, supported by the weaker dollar and mixed U.S. data. USD/JPY increased by 0.1%, maintaining its strength after reaching a new high. GBP/USD also gained 0.1%, bolstered by positive U.K. economic indicators and a softer dollar. AUD/USD climbed by 0.49%, driven by risk-on sentiment and positive economic data from China. The dollar's mixed performance reflects the market's cautious approach ahead of further economic indicators and central bank meetings.

Currency Outlook

A cautious approach with potential volatility is expected in the currency markets. EUR/USD is likely to continue its gradual ascent if U.S. data points to a slowing economy and a dovish Fed policy. USD/JPY may face resistance if Japanese authorities intervene to curb the yen's weakness, but the overall trend remains upward due to U.S.-Japan yield differentials. GBP/USD could see further gains if U.K. economic data remains robust and the dollar weakens. AUD/USD is expected to benefit from improved risk sentiment and stronger commodity prices. The market is poised for further adjustments based on upcoming data releases and central bank communications, with a focus on inflation trends and economic growth indicators.

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