This has been an eventful week economically. The US markets have been surprisingly volatile because of tariff changes and the upcoming release of important inflation data. For one, the US Dollar has obviously shot up in strength against the Yen. Yet investors are continuing to play it safe because of President Trump’s unexpected new tariff measures. These changes have increased the trade-weighted average tariff rate on all US imports by about 5.5-6.0 percentage points. The USD Index is trading in a fairly tight range just under 104.50 today. The US Personal Consumption Expenditures (PCE) inflation data, expected to hold firm at a still high 2.5% for February, is being closely watched by market participants.
USD/JPY and EUR/USD Show Varied Movements
After bouncing higher post-Payrolls, the USD/JPY pair has resumed its slight declines, trading back under 105.50 during the European morning session on Friday. This politically motivated move has led to continued volatility as investors anticipate the tariff shifts and upcoming inflation reports. In the other European markets, the EUR/USD recovered sharply on Thursday. It returned almost 0.5%, ending a six-day run of losses. From the outset of early Friday, you could see the EUR/USD losing some upside steam, remaining under the 1.0800 figure.
The drop in currency pairs highlights how jittery the market is in anticipation of future economic signals. The Bank of Japan’s Summary of Opinions underscored this, with one policymaker stating that inflation is now “somewhat overshooting” outlook. Unfortunately, this overly-optimistic statement creates yet another hurdle to upcoming market forecasts. Additionally, Tokyo’s Consumer Price Index rose by 2.9% year-on-year in March, up from February’s 2.8%, reflecting incremental inflationary pressures.
Gold and Central Banks’ Strategic Moves
Gold prices are marching higher, largely driven by their negative correlation with the US Dollar. They have continued to prosper side by side with US Treasuries, the other big reserve and safe-haven asset. Central banks, particularly in countries that are themselves emerging economies like China, India and Turkey, are building their Gold reserves at an unbelievable pace. This methodical build up to 2009 underscores Gold’s timeless allure as a safe haven during periods of economic turbulence and currency devaluation.
Central banks are an important market dynamic as the largest holders of Gold. Their buying habits have a huge impact on international Gold prices. Unfortunately, this trend seems destined to continue. Commercial banks are making a concerted effort to diversify their reserve holdings because of increasing geopolitical tensions and ongoing economic instability.
Retail Sales and Inflation Data in Focus
Across the Channel in the UK, economic data had more good news to spread. The Office for National Statistics reported a surprise 1% rise in retail sales for February on a month-on-month basis. This increase indicates a continuation in the recovery of consumer spending, providing a ray of hope in the wake of more troubling news on the economic front.
Here in the US, markets are hoping to see a repeat of that trend when we see the first PCE Price Index data on Friday. This index is the Fed’s favorite measure of inflation. All eyes will be on this data release as it will be central to the developing market expectations and monetary policy outlooks. The anticipated stability in annual PCE inflation at 2.5% for February will be scrutinized closely by investors seeking clues about the Federal Reserve’s future policy moves.