The dollar index (DXY00) on Tuesday finished up by +0.31% and posted a 1-1/2 week high. The dollar found support Tuesday on increased safe-haven demand after Moody’s Investors Service downgraded China’s credit outlook to negative from stable due to rising debt. Weakness in the euro also supported the dollar after dovish ECB comments knocked EUR/USD down to a 3-week low Tuesday. The dollar fell back from its best levels after the U.S. Oct JOLTS job openings fell more than expected to a 2-1/2 year low, a dovish factor for Fed policy.
Tuesday’s U.S. economic news was mixed for the dollar. On the bullish side, the Nov ISM services index rose +0.9 to 52.7, stronger than expectations of 52.3. Conversely, Oct JOLTS job openings fell -617,000 to a 2-1/2 year low of 8.733 million, showing a weaker labor market than expectations of 9.300 million.
The markets are discounting a 0% chance for a +25 bp rate hike at the next FOMC meeting on Dec 12-13 FOMC and a 0% chance for that +25 bp rate hike at the following FOMC meeting on Jan 30-31, 2024. The markets are then discounting a 76% chance for a -25 bp rate cut at the March 19-20, 2024, FOMC meeting and are more than discounting (152%) that -25 bp rate cut at the Apr 30-May 1, 2024, FOMC meeting.
EUR/USD (^EURUSD) on Tuesday fell by -0.41% and slid to a 3-week low. The euro tumbled Tuesday on dovish comments from ECB Executive Board member Schnabel, who said another hike in interest rates by the ECB was "rather unlikely." Losses in the euro were limited after the ECB’s Oct 1-year inflation expectations were higher than expected and after the Eurozone Nov S&P composite PMI was revised upward.
ECB Executive Board member Schnabel said inflation in the Eurozone is showing a "remarkable" slowdown, making another hike in interest rates "rather unlikely."
The Eurozone Nov S&P composite PMI was revised upward by +0.5 to 47.6 from the previously reported 47.1.
Eurozone Oct PPI rose +0.2% m/m and fell -9.4% y/y, close to expectations of +0.2% m/m and -9.5% y/y.
The ECB's monthly inflation expectations survey showed Oct 1-year inflation expectations unchanged at 4.0% from Sep, stronger than expectations of 3.8%. 3-year inflation expectations were 2.5%, unchanged from Sep and right on expectations.
Swaps tied to ECB meeting dates have now priced in an 86% chance that the ECB will reduce its benchmark rate by -25 bp at the March 7 meeting and have priced in a 68% chance of -50 bp of rate cuts by the April 11 ECB meeting.
USD/JPY (^USDJPY) on Tuesday rose by +0.01%. The yen on Tuesday fell slightly after the weaker-than-expected Tokyo Nov CPI report dampened the outlook for tighter BOJ monetary policy. Losses in the yen were limited due to a slide in T-note yields. Also, Tuesday’s decline in the Nikkei Stock Index to a 3-week low boosted some safe-haven demand for the yen.
Tuesday’s Japanese economic news was weaker than expected and bearish for the yen. The Nov Jibun Bank services PMI was revised downward by -0.9 to 50.8 from the previously reported 51.7. Also, Tokyo Nov CPI eased to +2.6% y/y from +3.2% y/y in Oct, weaker than expectations of +3.0% y/y and the slowest pace of increase in 16 months. The Tokyo Nov CPI ex-fresh food and energy eased to +3.6% y/y from +3.8% y/y in Oct, better than expectations of +3.7% y/y.
February gold (GCG4) Tuesday closed down -5.90 (-0.29%), and Mar silver (SIH24) closed down -0.361 (-1.45%). Gold and silver prices Tuesday extended Monday’s sharp losses and posted 1-week lows. Tuesday’s rally in the dollar index to a 1-1/2 week high weighed on metals prices. A slump in the U.S. 10-year breakeven inflation rate Tuesday to a 4-1/2 month low has also curbed demand for gold as an inflation hedge. A decline in global bond yields on Tuesday limited losses in precious metals. Also, dovish comments from ECB Executive Board member Schnabel were bullish for precious metals when she said another hike in interest rates by the ECB is "rather unlikely."
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.
