The dollar index (DXY00) Wednesday fell by -0.57%. The dollar retreated Wednesday after the US May CPI rose less than expected, boosting expectations for Fed easing later this year. Also, Wednesday’s rally in the S&P 500 to a new record high reduced liquidity demand for the dollar. The dollar recovered from its worst levels Wednesday after the FOMC projected only 25 bp of rate cuts this year compared to 75 bp of rate cuts back in March.
US May CPI unexpectedly eased to +3.3% y/y from +3.4% y/y in Apr versus expectations of no change at +3.4% y/y. May CPI ex-food and energy eased to a 3-year low of +3.4% y/y, weaker than expectations of +3.5% y/y.
As expected, the FOMC kept the fed funds target range unchanged at 5.25%-5.50% and said it doesn't expect to cut rates "until it has gained greater confidence that inflation is moving sustainably toward 2%."
The FOMC kept its US 2024 GDP forecast at +2.4%, unchanged from March, but raised its 2024 core PCE forecast to +2.8% from +2.6% in March.
The FOMC forecast the fed funds rate at 5.1% at the end of 2024 versus a 4.6% forecast in March, signaling only one 25 bp rate cut this year compared to 75 bp of rate cuts projected in March.
Fed Chair Powell said inflation has eased substantially but is still too high and the Fed is keeping its restrictive stance to lower demand versus supply. He added that today's CPI report is "progress" but not enough to warrant loosening policy.
The markets are discounting the chances for a -25 bp rate cut at 8% for the July 30-31 FOMC meeting and 60% for the following meeting on Sep 17-18.
EUR/USD (^EURUSD) Wednesday rose by +0.68%. The euro rallied Wednesday after the dollar tumbled on the weaker-than-expected US May CPI report. The euro also garnered support from hawkish comments Wednesday from ECB Executive Board member Schnabel, who said the economy is recovering gradually, and from ECB Governing Council member Patsalides, who said, "further actions of the ECB on interest rates will depend on the data we will have."
ECB Executive Board member Schnabel said the Eurozone economy is recovering gradually, but the "last mile" of disinflation is proving bumpy.
ECB Governing Council member Patsalides said, "Further actions of the ECB on interest rates will depend on the data we will have," and there is no specific direction to which the central bank is committed, and it retains its options.
Swaps are discounting the chances of a -25 bp rate cut by the ECB at 11% for the July 18 meeting and 59% for the September 12 meeting.
USD/JPY (^USDJPY) Wednesday fell by -0.35%. The yen rallied against the dollar Wednesday after Japan's May PPI rose more than expected, a hawkish factor for BOJ policy. The yen added to its gains when T-note yields tumbled on Wednesday’s weaker-than-expected US May CPI report.
Japan's May PPI rose +2.4% y/y, stronger than expectations of +2.0% y/y and the largest increase in 9 months.
Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 5% for the June 14 meeting and at 75% for the July 31 meeting.
August gold (GCQ4) Wednesday closed up +28.2 (+1.21%), and July silver (SIN24) closed up +1.036 (+3.54%). Precious metals rallied moderately on Wednesday due to weakness in the dollar. Also, Wednesday’s weaker-than-expected US May CPI report knocked T-note yields lower and bolstered the case for the Fed to cut interest rates, a bullish factor for precious metals. In addition, the collapse of ceasefire talks in Gaza Wednesday signals that the war will continue, which has boosted the safe-haven demand for precious metals. Gold prices dropped more than -$12 an ounce after the close of trading Wednesday afternoon when the FOMC signaled only 25 bp rate cuts this year versus projections of 75 bp rate cuts back in March.
On the bearish side for precious metals was Wednesday’s rally in the S&P 500 to a new all-time high, which reduces safe-haven demand for precious metals. Also, a decline in inflation expectations reduces demand for gold as an inflation hedge after the 10-year breakeven inflation rate Wednesday fell to a 4-month low. In addition, Wednesday’s Japan May PPI report rose more than expected, which is a hawkish factor for BOJ policy.
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
