US Dollar Outlook: Fed 2024 interest rate cut "starting to look increasingly more out of reach"

April 26, 2024 - Written by John Cameron

STORY LINK US Dollar Outlook: Fed 2024 interest rate cut "starting to look increasingly more out of reach"

The Pound to Dollar exchange rate (GBP/USD) was unable to hold 1.2500, but did find support above 1.2450 and traded just below 1.2500.

The US Dollar posted renewed gains after the latest US data with markets even less confident over a Fed cut in interest rates amid fresh concerns over inflation trends.

The advance US GDP reading for the first quarter of 2024 came in at an annualised rate of 1.6% from 3.4% previously and well below consensus forecasts of 2.5%.

There was a net slowdown in consumer spending to 2.5% from 3.3% and below expectations of 2.8%.

According to the BEA; “Compared to the fourth quarter, the deceleration in real GDP in the first quarter primarily reflected decelerations in consumer spending, exports, and state and local government spending and a downturn in federal government spending.”

Much of the market attention was on the inflation evidence with the prices index at 3.1% from 1.7% previously and compared with forecasts of 3.0%.

The core reading increased sharply to 3.7% from 2.0% and above expectations of 3.4%.

The evidence of higher core inflation is likely to be seen in a stronger-than-expected PCE prices reading on Friday.

ING commented; “This suggests, assuming no revisions to monthly data, that the core PCE deflator will come in above 0.4% tomorrow rather than the current 0.3%MoM consensus forecast.

ING added; “That said, this inflation number is a quarter-on-quarter annualised measure, so any revisions to October through February could have influenced today's outcome - we won't know until tomorrow when we get the monthly income and spending report. We could still get a 0.3%MoM, but we have to acknowledge that today’s data makes it look less likely.”

Overall, there were fresh concerns over the underlying US inflation outlook, especially with a series of higher-than-expected readings.

There will, therefore, also be fresh concerns that the Federal Reserve will not be able to cut interest rates over the next few months.

Treasuries lost further ground after the data with the 10-year yield increasing to around 4.73% and the highest level since early November 2023.

The 2-year yield also traded above the 5.00% level.

Following the data, the market pricing for a rate cut in June dipped further to only just above 10% while the potential for a July cut also slipped to just over 30%.

US equities also posted sharp losses which hampered risk appetite.

Elsewhere, US initial jobless claims declined to 207,000 in the latest week from 212,000 and below expectations of 212,000 while continuing claims also declined on the week.

ING also noted that GDP growth data was weaker than expected and added; “The move higher in market borrowing costs this year will also weigh on activity and eventually dampen price pressures in the economy. Nonetheless, there is next to no chance of a rate cut before September.”

Olu Sonola, head of US Economic Research at Fitch, added; “The hot inflation print is the real story in this report. If growth continues to slowly decelerate, but inflation strongly takes off again in the wrong direction, the expectation of a Fed interest rate cut in 2024 is starting to look increasingly more out of reach."

As far as the UK is concerned, the CBI retail sales survey dipped sharply to -44 for April from 2 previously and substantially below expectations of -2.

Retailers also expect a decline in sales next month with an expected reading of -19.

CBI Lead Economist Alpesh Paleja commented; “April’s sharp fall in retail sales was likely related to the earlier timing of Easter this year, so we should take it with a pinch of salt.”

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TAGS: American Dollar Forecasts