The dollar index (DXY00) Wednesday recovered from a 1-week low and rose by +0.01%. The dollar found support Wednesday on reduced expectations for a 50 bp rate cut by the Fed at the September 17-18 FOMC meeting after swaps markets showed the chances for a 50 bp rate cut fell to 41% from 75% last week.
The dollar Wednesday initially retreated to a 1-week low as Wednesday’s as-expected US Jul CPI report reinforced expectations for the Fed to cut interest rates at next month’s FOMC meeting, a bearish factor for the dollar. Also, Wednesday’s rally in the S&P 500 to a 1-1/2 week high curbed liquidity demand for the dollar.
US MBA mortgage applications rose +16.8% in the week ended August 9, with the purchase mortgage sub-index up +2.8% and the refinancing sub-index up +34.5%. The average 30-year fixed rate mortgage fell -1 bp to a 5-month low of 6.54% from 6.55% the previous week.
US July CPI eased to 2.9% y/y from 3.0% y/y, better than expectations of no change at 3.0% y/y and the smallest year-on-year increase in over three years. July CPI ex-food and energy eased to 3.2% y/y from 3.3% y/y in Jun, right on expectations and the smallest annual increase in 3-1/4 years.
The markets are discounting the chances at 100% for a -25 bp rate cut at the Sep 17-18 FOMC meeting and at 40% for a -50 bp rate cut at that meeting.
EUR/USD (^EURUSD) Wednesday rose by +0.19% and posted a 7-1/4 month high. The euro moved higher Wednesday on speculation that the Fed will cut interest rates by more than the ECB is boosting the euro as swap markets have priced in 100 bp of Fed rate cuts by December, compared to only 70 bp of cuts by the ECB. Gains in the euro were limited after Eurozone Q2 employment weakened and Eurozone Jun industrial production unexpectedly declined, dovish factors for ECB policy.
Eurozone employment eased last quarter as Q2 employment rose +0.2% q/q and +0.8% y/y, weakening from +0.3% q/q and +1.0% y/y in Q1.
Eurozone June industrial production unexpectedly fell -0.1% m/m, weaker than expectations of +0.5% m/m.
Swaps are discounting the chances of a -25 bp rate cut by the ECB at 99% for the September 12 meeting.
USD/JPY (^USDJPY) Wednesday rose by +0.30%. The yen came under pressure Wednesday after Japanese Prime Minister Kishida said he won't run for a second term as leader of Japan's ruling party, which creates political uncertainty in Japan. Also, Wednesday’s rally in the Nikkei Stock Index to a 1-1/2 week high reduced safe-haven demand for the yen. The yen found some support Wednesday from lower T-note yields.
Swaps are pricing in the chances for a +10 bp rate hike by the BOJ at 0% for the September 20 meeting and +10% for the October 30-31 meeting.
December gold (GCZ24) Wednesday closed down -28.10 (-1.12%), and September silver (SIU24) closed down -0.447 (+1.61%). Gold and silver prices on Wednesday fell back from 1-week highs and closed moderately lower. Reduced expectations for a 50 bp rate cut at next month’s FOMC meeting weighed on gold prices Wednesday as swap markets have priced in only a 41% chance for a 50 bp rate cut, down from 75% last week. Wednesday’s rally in the S&P 500 to a 1-1/2 week high also curbed safe-haven demand for precious metals. A negative factor for silver was Wednesday’s report that showed an unexpected decline in Eurozone June industrial production, a bearish factor for industrial metals demand.
Wednesday’s Fed-friendly US Jul CPI report bolsters the outlook for the Fed to cut interest rates at the Sep 17-18 FOMC meeting, a bullish factor for precious metals prices. Also, lower T-note yields on Wednesday were supportive of precious metals. In addition, safe-haven demand for precious metals remains strong as an attack by Iran on Israel may be imminent in retaliation for the recent assassination of a Hamas political leader in Tehran.
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.
