The dollar index (DXY00) on Wednesday rose by +0.40% as the market focused on Fed Chair Powell’s comment that he would not “at all” rule out two consecutive rate hikes. The markets are discounting only one +25 bp rate hike through year-end.
Meanwhile, EUR/USD (^EURUSD) fell -0.41% on dollar strength and weaker Eurozone economic reports than were seen in the U.S. earlier this week. USD/JPY (^USDJPY) rose +0.24%.
Central bank chiefs spoke Wednesday at a policy conference held by the ECB in Sintra, Portugal. Fed Chair Powell said he won’t take two consecutive rate hikes off the table “at all.” Powell also said, “Policy hasn’t been restrictive for very long. So, we believe there’s more restriction coming.”
Meanwhile, ECB President Lagarde said, in response to a question, that the ECB is not considering a pause in interest rate hikes. She said another rate hike at their next meeting in July is very likely. Bank of England (BOE) Governor Bailey said, “We have a job to do,” and the BOE will do what is necessary to bring inflation down.
Bloomberg reported Wednesday that some hawkish ECB officials are weighing options for speeding up the reduction of the ECB’s balance sheet, including the slowdown of the reinvestment of maturing securities or even the sale of securities. Bloomberg said that no decision is imminent, and there has been no formal discussion of such measures in the ECB Governing Council. The ECB is currently reducing the size of its balance sheet by allowing an average of 15 billion euros worth of securities to roll off each month. The ECB plans to fully halt the reinvestment of maturing securities under its Asset Purchase Program next month. The decline in the ECB’s balance sheet causes a reduction in reserves and liquidity for the Eurozone banking system, which is bearish for stocks.
Wednesday’s Eurozone economic reports were mixed. The July German GfK consumer confidence index fell by -1.0 point to -25.4, weaker than market expectations for an increase to -23.0. The June French consumer confidence index rose +2 points to 85, slightly stronger than expectations for a +1 point increase to 84. Italy’s June May EU-harmonized CPI eased to +6.7% y/y from May’s +8.0% y/y and was slightly weaker than expectations of +6.8% y/y.
August gold (GCQ3) Wednesday closed -1.60 (-0.08%), and July silver (SIN23) closed down -0.071 (-0.31%). Gold was undercut by Wednesday’s hawkish central bank comments and the +0.4% rally in the dollar index. The -5.4 bp decline in the 10-year T-note yield Wednesday was a bullish factor for precious metals prices.
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.
