The dollar index (DXY00) today is down by -0.12%. The dollar is trading defensively ahead of this afternoon’s FOMC decision. Heightened speculation the Fed will opt to cut the fed funds target range by 50 bp today instead of 25 bp is weighing on the dollar as swap markets show that the odds of a 50 bp rate cut rose to 66% today from 52% last Friday. The dollar recovered from its worst levels after today’s US housing starts and building permits report rose more than expected, a hawkish factor for Fed policy.
US Aug housing starts rose +9.6% m/m to a 4-month high of 1.356 million, stronger than expectations of 1.318 million. Aug building permits, a proxy for future construction, rose +4.9% m/m to a 5-month high of 1.475 million, stronger than expectations of 1.410 million.
The markets are discounting the chances at 100% for a -25 bp rate cut at the conclusion of today’s FOMC meeting and at 66% for a -50 bp rate cut at that meeting.
EUR/USD (^EURUSD) today is up by +0.10%. Weakness in the dollar today is supporting mild gains in the euro. Also, today’s 10-year German bund yield jumped to a 1-week high, strengthening the euro’s interest rate differentials. Dovish comments today from ECB Governing Council member Villeroy de Galhau limited gains in the euro when he said the ECB should continue to cut interest rates.
ECB Governing Council member Villeroy de Galhau said, "The ECB has cut interest rates twice and should continue to cut them," as victory over inflation is "within sight."
Swaps are discounting the chances of a -25 bp rate cut by the ECB at 26% for the October 17 meeting and at 100% for that 25 bp rate cut at the December 12 meeting.
USD/JPY (^USDJPY) today is down by -0.39%. Central bank divergence is boosting the yen as the Fed is expected to begin cutting interest rates today, while the BOJ is expected to keep raising rates. Gains in the yen are subdued due to today’s weaker-than-expected Japanese machine orders and trade reports. Also, higher T-note yields today are bearish for the yen.
Japan July core machine orders unexpectedly fell -0.1% m/m, weaker than expectations of +0.5% m/m.
Japan's trade news today was weaker than expected as Aug exports rose +5.6% y/y, below expectations of +10.6% y/y. Also, Aug imports rose +2.3% y/y, below expectations of +15.0% y/y.
Swaps are pricing in the chances for a +10 bp rate hike by the BOJ at 0% for the September 20 meeting and at +7% for the October 30-31 meeting.
December gold (GCZ24) today is up +8.40 (+0.32%), and December silver (SIZ24) is down -0.119 (-0.38%). Precious metals today are mixed. Today’s weaker dollar is bullish for metals. Also, heightened speculation the Fed will cut interest rates by 50 bp at the conclusion of today’s FOMC meeting boosted demand for precious metals as a store of value as the swap markets boosted the chance for a 50 bp rate cut this week to 66% from 52% last Friday. In addition, dovish comments today from ECB Governing Council member Villeroy de Galhau lifted gold prices when he said the ECB should continue to cut interest rates. Silver also garnered support from today’s stronger-than-expected US Aug housing starts and building permits report, which was positive for industrial metals demand.
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.
