The dollar index (DXY00) Wednesday rose by +0.15%. The dollar raced to its high Wednesday after the May ISM services index rose more than expected, a hawkish factor for Fed policy. The euro is being undercut by expectations for the ECB to cut interest rates on Thursday. Also, Wednesday’s mixed news on Japanese wages weighed on the yen to the dollar’s benefit.
On the bearish side for the dollar, the US May ADP employment change rose less than expected, a dovish factor for Fed policy. Also, T-note yields moved lower, which weakened the dollar’s interest rate differentials.
The US May ISM services index rose +4.4 to 53.8, stronger than expectations of 51.0 and the highest level in 9 months.
The US May ADP employment change rose +152,000, weaker than expectations of +175,000.
The markets are discounting the chances for a -25 bp rate cut at 1% for the June 11-12 FOMC meeting, 19% for the following meeting on July 30-31, and 65% for the meeting after that on Sep 17-18.
EUR/USD (^EURUSD) Wednesday fell by -0.05%. Dovish Eurozone economic news Wednesday undercut the euro. Eurozone Apr producer prices fell more than expected and the Eurozone May S&P composite PMI was revised lower. Also, expectations that the ECB will cut its main refinancing rate by -25 bp at Thursday's meeting are negative for the euro.
Eurozone Apr PPI fell -1.0% m/m and -5.7% y/y, weaker than expectations of -0.7% m/m and -5.3% y/y.
The Eurozone May S&P composite PMI was revised downward by -0.1 to 52.2 from the previously reported 52.3.
Swaps are discounting the chances of a -25 bp rate cut by the ECB at 99% for Thursday’s ECB meeting. If the ECB cuts rates by -25 bp on Thursday as expected, then the markets are expecting a 0% chance of another rate cut at the following meeting on July 18 and a 64% chance of a -25 bp rate cut at the September 12 meeting.
USD/JPY (^USDJPY) Wednesday rose by +0.79%. The yen was under pressure Wednesday from mixed Japanese wage news that could prompt the BOJ to delay tightening monetary policy. The yen recovered from its worst levels after T-note yields moved lower, a supportive factor for the yen.
Japan Apr labor cash earnings rose +2.1% y/y, stronger than expectations of +1.8% y/y and the largest increase in 10 months. However, Apr cash earnings on the same sample base rose +1.7% y/y, weaker than expectations of +2.1% y/y.
The Japan May Jibun Bank services PMI was revised upward by +0.2 to 53.8 from the previously reported 53.6.
Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 16% for the June 14 meeting.
August gold (GCQ4) Wednesday closed up +28.10 (+1.20%), and July silver (SIN24) closed up +0.456 (+1.54%). Precious metals Wednesday closed moderately higher. Precious metals found support on Wednesday’s weaker-than-expected US May ADM employment change, which was dovish for Fed policy. Also, a decline in T-note yields Wednesday was bullish for precious metals. In addition, expectations that the ECB will cut interest rates on Thursday boosted demand for gold as a store of value.
On the negative side for precious metals Wednesday was a stronger dollar. Also, Wednesday’s rally in the S&P 500 to a new record high reduced the safe-haven demand for precious metals. In addition, a decline in inflation expectations curbed demand for gold as an inflation hedge after the 10-year breakeven inflation rate fell to a 2-1/2 week low of 2.300% on Wednesday.
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.
