The dollar index (DXY00) Thursday fell to a 1-1/2 week low and finished down by -0.28%. Stagflation concerns weighed on the dollar Thursday after revised US Q1 GDP showed slower-than-expected economic growth, along with persistent price pressures. The dollar initially moved higher Thursday after bond yields jumped when Thursday’s US economic news showed signs of persistent inflation and labor market strength, hawkish factors for Fed policy. Also, Thursday’s slump in stocks initially boosted liquidity demand for the dollar.
US weekly initial unemployment claims unexpectedly fell -5,000 to a 2-month low of 207,000, showing a stronger labor market than expectations of an increase to 215,000.
US Q1 GDP was revised downward to 1.6% (q/q annualized) from 3.4%, weaker than expectations of 2.5%, as Q1 personal consumption was revised lower to 2.5% from 3.3%, weaker than expectations of 3.0%. The Q1 core PCE price index was revised upward to +3.7% from +2.0%, stronger than expectations of +3.4%.
US Mar pending home sales rose +3.4% m/n, stronger than expectations of +0.4% m/m.
The markets are discounting the chances for a -25 bp rate cut at 3% for the next FOMC meeting on April 30-May 1 and 12% for the following meeting on June 11-12.
EUR/USD (^EURUSD) on Thursday rose by +0.31% and posted a 2-week high. The euro found support Thursday after the German May GfK consumer confidence index rose more than expected to a 2-year high. Also, hawkish comments from ECB Governing Council member Muller boosted the euro when he said he is not in favor of cutting interest rates for a second straight meeting following an expected first cut in June. Gains in the euro were limited after ECB Governing Council member Panetta said that ECB rate cuts are needed soon.
The German May GfK consumer confidence index rose +3.1 to a 2-year high of -24.2, stronger than expectations of -26.0.
ECB Governing Council member Panetta said that ECB rate cuts are needed soon as "unnecessary delays may take us uncomfortably close to the effective lower bound at a later stage if stagflation is entrenched and inflation expectations fall below target."
Swaps are discounting the chances for a -25 bp rate cut by the ECB at 84% for its next meeting on June 6.
USD/JPY (^USDJPY) on Thursday rose by +0.14%. The yen Thursday dropped to a new 33-year low against the dollar and finished moderately lower. Higher T-note yields Thursday weighed on the yen. Losses in the yen were limited by concern that Japanese authorities could intervene in the forex market at any time to support the yen after many Japanese officials recently said they would take necessary action to address excessive moves in the yen if needed. Also, some short covering ahead of the results of Friday’s BOJ meeting supported the yen.
Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 8% for the April 26 meeting and 45% for the following meeting on June 14.
June gold (GCM4) Thursday closed up +4.1 (+0.18%), and May silver (SIK24) closed up +0.007 (+0.03%). Precious metals recovered from early losses on Thursday and posted modest gains. Short covering in metals pushed prices high after the dollar index fell to a 1-1/2 week low. Also, weakness in stocks Thursday boosted some safe-haven demand for precious metals. In addition, dovish comments Thursday from ECB Governing Council member Panetta boosted demand for gold as a store of value when he said ECB rate cuts are needed soon to avoid ultra-low interest rates later.
Precious metals initially moved lower on Thursday due to higher global bond yields. Also, Thursday’s US economic news, showing persistent inflation and strength in the labor market, was hawkish for Fed policy and bearish for precious metals. In addition, gold prices are under pressure as funds continued to liquidate their long gold positions after long gold holdings in ETFs fell to a 4-1/2 year low 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.
