Jul
Emerging market currencies surged to their highest levels since May as US consumer prices unexpectedly declined in June, solidifying expectations of an imminent interest rate cut by the Federal Reserve. The South African rand and the Korean won spearheaded a 0.2% rise in the developing-world currency index, buoyed by a weakening US dollar. Concurrently, major US-listed exchange-traded funds posted significant gains, propelling the broad equity index to its highest close in two years.
Fed Rate Cut Speculation Intensifies
US consumer prices dropped 0.1% in June, the first decrease in four months. Core inflation, excluding food and energy, saw its slowest monthly rise since August 2021. Market swaps indicated heightened expectations for a third Fed rate cut this year. Marco Oviedo of XP Investimentos noted the positive impact on emerging markets.
The US consumer price drop in June signals easing inflation, potentially prompting Fed rate cuts, WSJ Print Subscription said.
Global Implications and Market Reactions
The favorable US inflation data overshadowed accommodative monetary policies elsewhere, including lower inflation readings in Hungary, Czech Republic, and Romania, which reinforced expectations of monetary easing in those regions. However, Latin American currencies showed mixed performance amidst a surge in the Japanese yen, prompting concerns about unwinding carry trades.
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Regional Developments
In Romania, easing inflation enabled the central bank to ease monetary policy after its first rate cut in three years. Serbia also cut rates twice in two months amidst inflation moderation. In Asia, China implemented strict measures to stabilize its falling stock market. Malaysia’s central bank kept its benchmark interest rate unchanged to evaluate the impact of fuel subsidy reductions.
Future Outlook
Economists are expecting Peru’s central bank to maintain its current interest rate of 5.75% during its upcoming meeting on Thursday. This decision comes against the backdrop of ongoing economic uncertainties both regionally and globally. Meanwhile, market analysts are closely watching key economic indicators in the United States for any signals that could shed light on future Federal Reserve policies.
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