The dollar index (DXY00) Wednesday fell slightly by -0.17% following two sessions of small gains. The dollar fell despite a +4.1 bp rise in the 10-year T-note yield and weakness in stocks.
The dollar on Wednesday gave up Tuesday’s small rally that was sparked by the slightly hawkish U.S. CPI report. In Tuesday’s report, the Feb core CPI dipped to a 2-3/4 year low of +3.8% y/y. However, the Feb headline CPI of +3.2% y/y was slightly above expectations of +3.1% and was 0.2 points above last June’s 2-3/4 year low of +3.0%. Both CPI measures remain well above the Fed’s +2% inflation target.
The markets are discounting the chances for a -25 bp rate cut at 1% for next week’s March 19-20 FOMC meeting, 13% for the following meeting on April 30-May 1, and 73% for the meeting after that on June 11-12.
On the U.S. economic report front, the markets are awaiting Thursday’s U.S. retail sales and PPI reports. Feb retail sales are expected to show an increase of +0.8% m/m, reversing Jan’s -0.8% decline. Feb retail sales ex-autos are expected to rise +0.5% m/m, reversing most of Jan’s -0.6% decline. The Feb final-demand PPI is expected to rise to +1.2% y/y from Jan’s +0.9%, but the core PPI is expected to ease to +1.9% y/y from Jan’s +2.0%.
EUR/USD (^EURUSD) rose mildly by +0.24% on dollar weakness, shaking off dovish ECB comments and a weak Eurozone industrial production report. Jan Eurozone industrial production fell -3.2% m/m and -6.7% y/y, weaker than expectations of -1.8% m/m and -3.0% y/y.
ECB Council member Martins Kazaks said Wednesday that rate cuts could come “within the next few meetings.” Also, Bank of France Governor Francois Villeroy de Galhau said the ECB’s first rate cut is more likely in June than April.
Swaps are pricing in the chances for a -25 bp rate cut by the ECB at 12% for its next meeting on April 11 and 92% for the following meeting on June 6.
USD/JPY (^USDJPY) rose slightly by +0.07%. The yen continued to be undercut after BOJ Governor Ueda’s comment Tuesday that Japan’s consumption of non-durable goods is weak, which may have dampened the chances for a rate hike at next week’s BOJ meeting. The odds for a BOJ rate hike next week fell to 55% Wednesday from 69% on Tuesday.
Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 55% for next week’s meeting on March 19 and 70% for the following meeting on April 26.
April gold (GCJ4) Wednesday closed +14.70 (+0.68%), and May silver (SIK24) closed up +0.762 (+3.12%). April gold consolidated below last Friday’s nearest-futures record high. Gold prices saw support from the slightly lower dollar index and weakness in stocks. Gold was able to shake off the bearish effects from Wednesday’s +4.1 bp rise in the 10-year T-note yield. Also, funds continue to liquidate their long gold positions after long gold holdings in ETFs fell to a 4-1/2 year low on Tuesday.
Gold has underlying support from market expectations that the Fed and ECB will begin cutting interest rates in June. Precious metals prices also have underlying support from Middle East geopolitical tensions.
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.
