Peso may rise as US data bolster Fed cut hopes
THE PESO is expected to trade sideways with an upward bias against the dollar this week as recent US economic data strengthened expectations of a September rate cut by the US Federal Reserve.
The local unit closed at P58.35 per dollar on Friday, appreciating by 8.5 centavos from its P58.435 finish on Tuesday, Bankers Association of the Philippines data showed.
The market was closed on Wednesday and Thursday (July 24-25) following the suspension of work in government offices in Metro Manila after Typhoon Carina hit the capital.
Week on week, however, the peso inched down by 1.5 centavos from its P58.335 finish on July 19.
“The market seems to be in a holding pattern, searching for new drivers to dictate its next move. After the two-day closure, the pair resumed trading with pent-up buying pressure,” Security Bank Corp. Chief Economist Robert Dan J. Roces said in a Viber message on Friday.
The peso was also supported by a generally weaker dollar overnight as US economic data continued to boost expectations of a Fed rate cut this year, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message.
On Thursday, the dollar index, which measures the greenback against a basket of currencies including the yen and the euro, fell 0.05% to 104.33 after the release of US gross domestic product data, Reuters reported.
The US economy grew faster than expected in the second quarter amid solid gains in consumer spending and business investment, but inflation pressures subsided, leaving intact expectations of a September interest rate cut from the Federal Reserve.
Gross domestic product (GDP) increased at a 2.8% annualized rate last quarter, the Commerce department’s Bureau of Economic Analysis said in its advance estimate of second-quarter GDP. That was double the 1.4% growth pace in the first quarter.
The growth rate in the first half of the year averaged 2.1%, half the 4.2% pace logged in the last six months of 2023. That is just above the 1.8% pace viewed by US central bank officials as the non-inflationary growth rate.
The Fed has maintained its benchmark overnight interest rate in the current 5.25%-5.5% range for the past year. It has hiked its policy rate by 525 basis points since 2022. Financial markets expect three rate cuts this year, starting in September.
For this week, the peso will continue to be supported by stronger bets of monetary easing by the Fed following the personal consumption expenditures (PCE) index data released on Friday, Mr. Roces said.
US prices increased moderately in June as the declining cost of goods tempered a rise in the cost of services, underscoring an improving inflation environment that could position the Fed to begin cutting interest rates in September, Reuters reported.
The report from the Commerce department on Friday also showed consumer spending slowed a bit last month. Signs of easing price pressures and a cooling labor market could boost the confidence of Fed officials that inflation is moving toward the US central bank’s 2% target. The Fed will hold its next policy meeting on July 30-31.
The PCE price index nudged up 0.1% last month after being unchanged in May, the Commerce department’s Bureau of Economic Analysis reported. The increase in PCE inflation was in line with economists’ expectations.
In the 12 months through June, the PCE price index climbed 2.5%. That was the smallest year-on-year gain in four months and followed a 2.6% advance in May.
Excluding the volatile food and energy components, the PCE price index rose 0.2% last month. The so-called core PCE inflation gain was 0.182% before rounding. May’s unrounded figure was revised up to 0.127% from the previously reported 0.083%. April’s core PCE inflation was upgraded to 0.261% from the previously estimated 0.259% rise.
In the 12 months through June, core PCE inflation advanced 2.6%, matching May’s rise. Core inflation increased at a 2.3% annualized rate in the three months through June, sharply slowing from the 2.7% pace in May.
The Fed tracks the PCE price measures for monetary policy.
The market will also monitor other US data to be released this week, specifically the latest employment report, Mr. Ricafort added.
On Monday, the peso could range from P58.25 to P58.45 against the dollar, Mr. Ricafort said. Meanwhile, he expects the local unit to move between P58.05 and P58.55 against the greenback this week. — A.M.C. Sy with Reuters