Ringgit Gains on Inflation Data

The ringgit ended marginally higher against the US dollar on Friday, benefiting from a combination of cooling US inflation data and easing trade tensions between the United States and China, which improved risk appetite for emerging market currencies.

At 6 pm, the local currency appreciated to 4.0710/0745 against the greenback, compared to Thursday's close of 4.0830/0870. The modest gain reflects improved market sentiment, driven by expectations that the Federal Reserve may ease its aggressive monetary policy stance as inflation shows signs of moderating. The ringgit's performance was also supported by firmer crude oil prices, which often boost the Malaysian currency given the country's status as a net oil exporter, along with a slightly weaker US dollar index.

US Inflation Data Supports Ringgit

The ringgit's strength was largely attributed to the latest US inflation data, which came in slightly lower than market expectations. The softer inflation reading has reinforced expectations that the Federal Reserve may adopt a more accommodative stance, potentially leading to a weaker US dollar in the coming months.

Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid noted that the ringgit could strengthen further and potentially test the RM4.05 level if the Fed signals an end to its rate hiking cycle . The US dollar index, which measures the greenback's value against a basket of six major currencies, eased 0.42% to 104.38 points, further supporting the ringgit's recovery.

The cooling inflation data comes as a relief to global markets, which have been concerned about the Federal Reserve's aggressive monetary tightening. The US central bank has been hiking interest rates at a rapid pace to combat inflation, but a moderation in price pressures could allow the Fed to slow down or even pause its tightening cycle. This would be positive for emerging market currencies like the ringgit, which have been under pressure from a strong US dollar and higher US interest rates.

Trade Tensions Ease

The ringgit also benefited from easing trade tensions between the US and China, which have been a source of uncertainty for global markets in recent months. Any signs of de-escalation in the world's largest bilateral trade relationship tend to boost risk appetite and support emerging market currencies like the ringgit.

The US and China have been engaged in a protracted trade dispute, with both sides imposing tariffs on billions of dollars worth of goods. The conflict has weighed on global economic growth and increased uncertainty for businesses and investors. However, recent signs of dialogue and negotiation between the two sides have been welcomed by markets, providing a boost to risk sentiment.

Investors are also awaiting the official announcement of Malaysia's second-quarter gross domestic product, which could provide further direction for the ringgit. Bank Negara Malaysia is expected to announce GDP data next week, with advance estimates already indicating an expansion of 5.8% in the second quarter . A strong GDP reading would reinforce confidence in the Malaysian economy and provide additional support for the local currency.

Regional Currencies and Oil Prices

The ringgit's performance was also supported by firmer crude oil prices, which often boost the Malaysian currency given the country's status as a net oil exporter. Brent crude futures traded higher on Friday, providing additional support for the local unit. Higher oil prices improve Malaysia's terms of trade and boost the country's fiscal position, which are positive factors for the ringgit.

Most regional currencies traded mixed against the US dollar on Friday. The Singapore dollar, a key benchmark for the ringgit, traded in a narrow range, while the Thai baht and Indonesian rupiah showed modest gains. The Philippine peso, however, weakened slightly against the greenback.

Currency Performance Against USD Ringgit+0.29% Singapore Dollar+0.12% Thai Baht +0.25% Indonesian Rupiah +0.18% Philippine Peso-0.10%

Market Sentiment and Outlook

Market sentiment has been improving in recent weeks, driven by hopes that the Federal Reserve may soon end its rate hiking cycle. The cooling US inflation data has reinforced these expectations, providing support for emerging market currencies. The easing of trade tensions between the US and China has also been a positive factor, reducing one of the key sources of uncertainty for global markets.

However, the outlook for the ringgit remains closely tied to global economic developments and the trajectory of US monetary policy. While the recent data has been positive, there are still risks to the outlook. The Federal Reserve could still hike rates further if inflation proves to be more persistent than expected. Trade tensions between the US and China could also escalate again, weighing on risk sentiment.

The ringgit's modest gain against the US dollar reflects improved market sentiment driven by softer US inflation data and easing trade tensions between the US and China. With expectations that the Federal Reserve may adopt a more accommodative stance, the local currency could see further appreciation in the coming weeks.

However, the ringgit's outlook remains closely tied to global economic developments and the trajectory of US monetary policy. Investors will be watching for the official GDP data announcement from Bank Negara Malaysia, which could provide additional direction for the local unit. The ringgit's performance against the US dollar will also continue to be influenced by the movement of the US dollar index, oil prices, and the broader sentiment towards emerging market assets. The local currency's ability to test the RM4.05 level will depend on how these factors unfold in the coming weeks and months. If the Fed signals a clear end to its tightening cycle and the US-China trade relationship continues to improve, the ringgit could see further gains. Conversely, any setbacks in either of these areas could reverse the recent appreciation and put the ringgit back under pressure. For now, however, the ringgit appears to be on a more positive trajectory, supported by improving global conditions and a resilient domestic economy.