Dollar Slips on Reduced Fed Rate Hike Chances
The dollar index (DXY00) is down by -0.17% today. US economic news today showing weaker-than-expected inflation readings on Aug core PCE price index and the Q2 core PCE price index eases the chance of a Fed rate hike next month and is weighing on the dollar. Fed rate hike chances for the October FOMC meeting dropped to 35% today from 52% on Tuesday.
Dollar losses are limited today on signs of strength in the US economy after Q2 GDP was revised higher, and the Sep ADP employment change and Sep MNI Chicago PMI rose more than expected. Also, Aug personal spending rose the most in 5 months. In addition, today’s +1% increase in WTI crude oil raises inflation expectations that could prompt the Fed to tighten monetary policy, a supportive factor for the dollar.
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The US Sep ADP employment change rose by +90,000, stronger than expectations of +75,000.
US Aug personal spending rose +0.9% m/m, right on expectations and the largest increase in five months. Aug personal income rose +0.2% m/m, weaker than expectations of +0.5% m/m.
The US Aug core PCE price index, the Fed’s preferred inflation gauge, rose +0.2% m/m and +3.0% y/y, weaker than expectations of +0.3% m/m and +3.3% y/y.
US Q2 GDP was revised upward to +2.2% (q/q annualized), stronger than expectations of no change at +1.5%, as Q2 personal consumption was revised upward to +3.8% from the previously reported +3.4%. The Q2 core PCE price index was revised downward to +3.3% from the previously reported +3.6%.
The US Sep MNI Chicago PMI rose +11.7 to 58.8, stronger than expectations of 51.0 and the fastest pace of expansion in four months.
Markets are pricing in a 35% chance of a +25 bp Fed rate hike at the next FOMC meeting on October 27-28.
EUR/USD (^EURUSD) is up by +0.19% today. Dollar weakness is pushing the euro higher today. Also, signs of faster inflation in Germany are hawkish for ECB policy and supportive of the euro after German Sep CPI rose more than expected. In addition, today’s +1% increase in crude oil prices raises inflation risks that could persuade the ECB to keep tightening monetary policy, a bullish factor for the euro.
The German Sep unemployment change rose +12,000, showing a weaker labor market than expectations of 500.
German Aug retail sales rose +1.3% m/m, the largest increase in 14 months but slightly weaker than expectations of +1.5% m/m.
German Sep CPI (EU harmonized) rose +0.6% m/m and +3.3% y/y, stronger than expectations of +0.5% m/m and +3.2% y/y, with the +3.3% y/y gain the largest year-on-year increase in 2.75 years.
The markets are discounting a 27% chance of a +25 bp ECB rate hike at the ECB’s next policy meeting on October 29.
USD/JPY (^USDJPY) is down by -0.27% today. The yen climbed to a 1.5-week high against the dollar today on weaker-than-expected US inflation news, which reduces the chance of a Fed rate hike next month and weakens the dollar. Lower T-note yields today also support the yen.
The yen also has carryover support from Monday, when Reuters reported that Japan’s top currency official, Atsushi Mimura, said that Japan’s prime minister and finance minister, along with the US, have recently sent a “very clear” message about the yen’s depreciation. His comments have bolstered speculation that Japanese authorities may be preparing another joint intervention with the US to support the yen.
Gains in the yen are limited today amid weaker-than-expected Japanese economic news on Aug industrial production and Aug retail sales. Also, today’s +1% increase in crude oil prices is negative for Japan’s economy and the yen, as Japan imports more than 90% of its energy.
Japan Aug industrial production fell -1.7% m/m, weaker than expectations of -1.3% m/m and the biggest decline in six months.
Japan Aug retail sales fell -1.2% m/m, weaker than expectations of -1.1% m/m.
Markets are pricing in a 22% chance of a +25 bp BOJ rate hike at the next policy meeting on October 30.
December COMEX gold (GCZ26) is up +24.70 (+0.59%) today, and December COMEX silver (SIZ26) is up +0.012 (+0.02%).
Precious metals are moving higher today amid a weaker dollar. Also, favorable US inflation news today reduces the chance of a Fed rate hike next month, a supportive factor for precious metals. Silver prices also garnered support today after US Q2 GDP was revised higher, a supportive factor for industrial metals demand.
On the negative side is today’s +1% increase in crude oil prices, which raises inflation expectations and could prompt the world’s central banks to tighten their monetary policies, a bearish factor for precious metals. Also, today’s news showing stronger-than-expected German Sep CPI is hawkish for ECB policy and negative for precious metals. In addition, higher T-note yields today are weighing on precious metals.
Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 4-year high on Tuesday. Long holdings in silver ETFs rose to a 6-month high today.
Strong central bank demand for gold is supporting gold prices, after news last Monday that bullion held in China’s PBOC reserves rose by +650,000 ounces to 76.73 million troy ounces in August, the largest increase in three years and the twenty-second consecutive month the PBOC boosted its gold reserves.
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