The dollar index (DXY00) is trading slightly higher by +0.18% as US political factors continue to buffet the FX markets. Bearish factors for the dollar today include today’s -2.5 bp decline in the 10-year T-note yield and the weaker-than-expected US economic reports.
Today’s June US existing home sales report of -5.4% to 3.89 million was weaker than market expectations for a -3.2% drop to 3.98 million. Home sales continue to be undercut by high mortgage rates and high home prices.
Today’s July Richmond Fed manufacturing index fell by -7 points to -17, weaker than expectations for a +3 point rise to -7. The July Richmond Fed business conditions index fell by -1 point to -8, although June was revised higher by 3 points to -8 from -11.
Today’s July Philadelphia Fed non-manufacturing activity index fell sharply to -19.1 from 2.9 in June.
Vice President Harris has already locked up enough delegates in virtual voting to win the nomination as the Democratic presidential candidate at the Democratic convention in Chicago on August 19-22. The recent market narrative has been that a Trump win would be bullish for the dollar because a Trump administration would likely pursue tax cuts and a stimulative fiscal policy, which would be hawkish for Fed policy and thus bullish for the dollar. However, Mr. Trump has voiced support for a weaker dollar as a stimulus measure for US exports. By contrast, a win by VP Harris would be supportive of the status quo and not specifically bullish for the dollar.
The markets are looking ahead to Friday’s PCE deflator report for an update on when inflation may have fallen by enough to allow the Fed to proceed with a rate cut. The PCE deflator is the Fed’s preferred inflation measure. The consensus is that Friday’s June PCE deflator will ease to +2.4% y/y from May’s +2.6%, and the June core PCE deflator will ease to +2.5% y/y from May’s +2.6%. The expected PCE deflator reports of +2.4% y/y (headline) and +2.5% y/y (core) would represent new 3-1/4 year lows for both measures, which would give the Fed more confidence that inflation will continue to move lower towards its +2% inflation target.
The markets are discounting the chances for a -25 bp rate cut at 3% for the July 30-31 FOMC meeting and 100% for the following meeting on Sep 17-18.
EUR/USD (^EURUSD) is down by -0.37% on dollar strength. The euro continues to be undercut by perceptions of a weaker outlook for the euro’s interest rate differentials versus the dollar after ECB President Lagarde last week warned of downside risks for the Eurozone economy.
The preliminary-July Eurozone consumer confidence index rose by +1.0 point to -13.0, which was slightly stronger than expectations for a +0.5 point increase to -13.5.
ECB Vice President Luis de Guindos said today that the ECB, at its September meeting, will be in a much better place to make a monetary policy decision from an information standpoint than in July. The ECB left rates unchanged at its meeting last week, but ECB President Lagarde said the next ECB meeting on Sep 11-12 is “wide open.”
Swaps are discounting the chances of a -25 bp rate cut by the ECB at 80% for the September 12 meeting.
USD/JPY (^USDJPY) is down by -0.63%. The yen continues to see support from fears of another round of BOJ intervention to support the yen.
Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 44% for the July 31 meeting and 100% for the September 20 meeting.
August gold (GCQ24) today is up +13.3 (+0.54%), and September silver (SIU24) is up +0.034 (+0.13%). Gold prices are seeing support from lower T-note yields and higher US political uncertainty after President Biden dropped out of the presidential race on Sunday. Gold has underlying support after long gold holdings in ETFs rose to a 3-1/2 month high of 2,554.3 metric tons last Thursday, although gold holdings have since tailed off to 2552.0 metric tons. Gold is being undercut today by the slightly higher dollar.
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.
