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The Dollar is under pressure on a busy day for U.S. data and as investors reduce exposure ahead of the Thanksgiving holiday in the U.S. on Thursday.
The Federal Reserve's favourite measure of inflation won't be enough to prevent another rate cut in December.
The core PCE index rose 0.27% in October, which is the largest month-over-month increase since March. However, the figure is a shave lower than expectations for 0.3%.
Following the data, money market pricing shows there is now a 66% chance of a rate cut from the Fed next month, according to the Fed Funds Futures market, up from a 63% chance on Tuesday.
This development is consistent with the softening in the Dollar, which was evident in the final session of U.S. trade ahead of the Thanksgiving holiday.
The 12-month PCE index rose to 2.8% from 2.7% in October (and 3.4% one year ago), which suggests an uptick in inflationary pressures of late and should be enough to ensure the Fed maintains a cautious stance on cutting interest rates in the coming months. This will limit USD weakness.
Near-term though, the USD is giving back some ground.
The Pound to Dollar exchange rate was quoted two-thirds of a per cent higher on the day at 1.2658 as investors reduce exposure ahead of the Thanksgiving holiday in the U.S.
"The USD's overnight retreat also likely reflects some position reduction ahead of the Thanksgiving holiday in the US," says Daragh Maher, an analyst at HSBC.
Investment bank analysts are also seeing the prospect of USD selling as month-end flows start to dominate proceedings.
These are the flows created by portfolio managers buying and selling currencies to rebalance their portfolios to account for FX market movements in the preceding month.
Deutsche Bank's month-end model sees the potential for USD weakness, noting that post-election moves in U.S. assets have generated some sizable rebalancing signals on the relative equity performance, with EURUSD demand and USDSEK and USDCHF supply the largest signals within their model.
"Overall, the moves in equity markets, when adjusted for market capitalisation and FX performance this month, suggest month-end portfolio-rebalancing flows are likely to be moderate USD selling across the board," says Valentin Marinov, Head Of FX Strategy at Crédit Agricole.
Dollar weakness was also anticipated from a technical perspective, with numerous analysts noting the November rally was looking stretched and due a correction.
"We maintain our view that many positives related to Donald Trump’s victory at the US presidential election are already in the price of the USD," says Marinov, "we also note that FX investors’ love affair with the ‘Trump trade’ has pushed the USD into overvalued territory vs a number of G10 currencies."
James Reilly, Senior Markets Economist at Capital Economics, says of the Dollar, "history suggests that a period of consolidation is likely after such runs – that was the case on the two previous occasions such runs were chalked up."
Most analysts we follow see USD strength as a theme of 2025. However, the pace of the gains leaves it looking overvalued over shorter-term timeframes, opening the door to a December setback.
"A lot of 'good' news is now in the price; consolidation to persist," says Maher. "If the USD were an equity investment recommendation, we would most likely rate it as a 'hold' currently, a downgrade from our prior 'buy'."