The U.S. Dollar is trading in mostly tight ranges and in positive territory across the board after a rally yesterday based on impressive economic growth data.
Overview
While there will be a focus on inflation with Personal Consumption Expenditures numbers from August, Friday has already started with major announcements regarding the introduction of new tariffs. The U.S. administration wants to see 100.0% on branded pharmaceuticals and 25.0% on heavy-duty vehicles. We shall see how this also affects equities, which tumbled yesterday as the surprising expansion in both Gross Domestic Product and Durable Goods Orders also reduced bets that the Fed will feel the need to slash interest rates in an aggressive manner.
With GDP seeing the fastest annualized growth since the third quarter of 2023, the Fed will likely have voices making arguments for being more cautious about loose policy. It is also worth noting Atlanta Fed President Raphael Bostic said that the Fed should consider abandoning the 2.0% inflationary target and get rid of the “illusion of precision.” PCE at the time of writing came in as expected, meaning inflation for the basics keeps going at an annual pace of 2.7%. Spending as well as Incomes came in slightly better. With an economic situation that does not exude doom nor gloom, Fed officials may throw us some “hawkish” signals. University of Michigan Consumer Sentiment later and reaction to tariffs, including items like furniture, may move the needle.
What to Watch This Week…
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The complete Economic Calendar can be found here.
MXN ⇑
The Mexican Peso is strengthening a bit following some roller-coaster flows yesterday following the shock of stronger-than-expected GDP in the U.S. along with a Banxico decision to reduce interest rates by 25 basis points. Central bank officials produced a “hawkish cut,” similar to how the Fed did last week. Members highlighted that there are inflationary pressures to watch for while the economy shows resilience. There is also plenty of room to slash, but none of the members seem eager to cut by more than just 25bps at a time. The Peso’s (maybe super peso?) appreciation may exacerbate if the November meeting concludes in a pause.
EUR ⇑
The Euro is also rising with Friday turning out to be a bit of reversal of fortunes thus far for the Buck. While tariffs and other headlines regarding escalation of tensions with Russia may affect the currency, inflationary expectation gauges are also boosting it. Per an August ECB survey on 1-year as well as 3-year Consumer Price Index expectations, estimates are higher than forecast with 1-year at 2.8% vs 2.5% and 3-year at 2.5% vs 2.4%. The European Central Bank may hesitate to cut rates and potentially see the Fed keep reducing thus central bank policy divergence may be a factor in advancing Euro value remainder of the year.
