The dollar index (DXY00) Wednesday fell by -0.01%. The dollar on Wednesday fell from a 1-week high and finished little changed after EUR/USD rallied on news that President Trump and Russian President Putin agreed to begin talks on ending the war in Ukraine.
The dollar on Wednesday initially rallied after US Jan CPI unexpectedly accelerated, dampening expectations for additional Fed rate cuts and signaling the Fed will keep interest rates higher for longer. Also, higher T-note yields on Wednesday supported the dollar. In addition, Wednesday’s slump in stocks has boosted liquidity demand for the dollar.
US Jan CPI unexpectedly accelerated to +3.0% y/y from 2.9% y/y in Dec, stronger than expectations of no change at +2.9% y/y and the fastest pace of increase in 7 months. Jan CPI ex-food and energy unexpectedly accelerated to +3.3% y/y from 3.2% y/y in Dec, stronger than expectations of an easing to 3.1% y/y.
The markets are discounting the chances at 2% for a -25 bp rate cut at the next FOMC meeting on March 18-19.
EUR/USD (^EURUSD) Wednesday rose by +0.29%. On Wednesday, the euro recovered from early losses and posted moderate gains on the news that US President Trump and Russian President Putin agreed to begin talks on ending the war in Ukraine. The euro also garnered support Wednesday on hawkish comments from ECB Governing Council member Holzmann, who said inflation in the Eurozone is still a threat.
The euro Wednesday initially moved lower after the dollar rallied on the stronger-than-expected US Jan CPI report. Also, the slump in Italian Dec industrial production to its biggest decline in almost 3 years was bearish for the euro.
Italy’s Dec industrial production fell -3.1% m/m, weaker than expectations of -0.2% m/m and the largest decline in nearly 3 years.
ECB Governing Council member Holzmann said the ECB cutting interest rates by 50 bp this year to boost the economy is not a good decision as inflation in the Eurozone is still a threat due to tariffs.
Swaps are discounting the chances at 97% for a -25 bp rate cut by the ECB at the March 6 policy meeting.
USD/JPY (^USDJPY) Wednesday rose sharply by +1.26%. The yen sank to a 1-week low against the dollar Wednesday after the stronger-than-expected US Jan CPI report reduced expectations for easier Fed policy. The surge in T-note yields Wednesday also undercut the yen. The yen also had some negative carryover from Tuesday when the US imposed 25% tariffs on all steel, aluminum, and finished metal imports into the US.
Japan Jan machine tool orders rose +4.7% y/y, the fourth consecutive monthly increase.
April gold (GCJ25) Wednesday closed down -3.90 (-0.13%), and March silver (SIH25) closed up +0.463 (+1.43%). Precious metals Wednesday settled mixed. Wednesday’s stronger-than-expected US Jan CPI report curbed expectations for additional Fed interest rate cuts and is bearish for precious metals. Wednesday’s rally in the dollar index to a 1-week high and higher global bond yields were also bearish for precious metals. In addition, hawkish comments Wednesday from Fed Chair Powell weighed on precious metals when he said, “We want to keep policy restrictive for now.”
Losses in precious metals were limited Wednesday due to increased safe-haven demand after stock prices tumbled. Silver also rallied Wednesday on carryover support from a rally in copper prices after China tightened requirements for building new copper smelters, which could curb copper supplies.
