The dollar index (DXY00) on Wednesday fell by -0.03%. The dollar is under pressure from expectations the Fed will pause its rate-hike campaign at next week’s FOMC meeting. The market expects only a 29% chance the Fed will raise its fed funds target range by +25 bp next week. The dollar recovered from its worst levels after the 10-year T-note yield rose to a 1-1/2 week high of 3.799%.
Wednesday’s U.S. economic news was mixed for the dollar. On the bearish side, the U.S Apr trade deficit widened to -$74.6 billion from -$64.2 billion in Mar, the largest deficit in 6 months but smaller than expectations of -$75.8 billion. Conversely, Apr consumer credit rose +$23.01 billion, stronger than expectations of +$22.0 billion and the most in 5 months.
EUR/USD (^EURUSD) on Wednesday rose by +0.10%. Central bank divergence is bullish for the euro on the prospects for the Fed to pause raising interest rates next week while the ECB raises rates. Also, hawkish comments Wednesday from ECB Executive Board member Schnabel and ECB Governing Council member Knot supported EUR/USD when they said they favored additional rate hikes from the ECB.
Wednesday’s Eurozone economic news was bearish for the euro. German Apr industrial production rose +0.3% m/m, weaker than expectations of +0.6% m/m. Also, Italy’s Apr retail sales rose +0.2% m/m, weaker than expectations of +0.3% m/m.
Hawkish ECB comments were bullish for EUR/USD. ECB Executive Board member Schnabel said the ECB has "more ground to cover" on raising interest rates as core inflation proves stubborn. Also, ECB Governing Council member Knot said, "I'm not yet convinced that the ECB's current tightening is sufficient" and that prolonged inflation may prompt further increases in borrowing costs.
USD/JPY (^USDJPY) on Wednesday rose by +0.36%. The yen Wednesday gave up an early advance and turned lower on the increase in T-note yields. The yen Wednesday initially moved higher on signs of strength in Japan’s economy as Japan was the only G-7 country to see its manufacturing sector in expansion territory in May, according to PMI data. A slump in Japanese stocks Wednesday also boosted safe-haven demand for the yen after the Nikkei Stock Index fell -1.8%.
The Japan Apr leading index CI rose +0.7 to a 5-month high of 97.6, although weaker than expectations of 98.2.
August gold (GCQ3) on Wednesday closed down -23.10 (-1.17%), and July silver (SIN23) closed down -0.141 (-0.60%). Precious metals Wednesday posted moderate losses. Higher T-note yields Wednesday undercut gold prices. Also, hawkish comments Wednesday from ECB Executive Board member Schnabel and ECB Governing Council member Knot weighed on gold prices when they said they favored additional rate hikes from the ECB. In addition, the unexpected rate hike from the Bank of Canada Wednesday was bearish for precious metals.
A weaker dollar Wednesday was supportive of metals prices along with expectations for the Fed to pause its rate hike campaign at next week’s FOMC meeting. Market expectations show only a 29% chance the Fed will raise the fed funds target range by +25 bp at the June 13-14 FOMC meeting.
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.
