The dollar index (DXY00) Friday finished up by +0.33% and posted a 6-week high. Heightened political uncertainty in France is hammering the euro and supporting the dollar. Also, Friday’s stock slide has boosted liquidity demand for the dollar. In addition, hawkish comments from Clevland Fed President Mester boosted the dollar when she said she wants to see a few more months of good inflation data before cutting interest rates.
The US May import price index ex-petroleum unexpectedly fell -0.3% m/m, weaker than expectations of +0.2% m/m and the biggest decline in 11 months.
The University of Michigan US Jun consumer sentiment index unexpectedly fell -2.5 to a 7-month low of 65.6, weaker than expectations of an increase to 72.0.
The University of Michigan US June 1-year inflation expectations indicator was unchanged from May at 3.3%, above expectations of a decline to 3.2%. Also, the June 5-10 year inflation expectations indicator rose to a 7-month high of 3.1%, higher than expectations of no change at 3.0%.
Cleveland Fed President Mester said, "The risks to inflation are still on the upside." She added that she is happy to see inflation moving down after stalling in Q1 and wants to see a few more months of good inflation data before cutting interest rates.
The markets are discounting the chances for a -25 bp rate cut at 14% for the July 30-31 FOMC meeting and 66% for the following meeting on Sep 17-18.
EUR/USD (^EURUSD) Friday fell by -0.33% and posted a 6-week low. Political uncertainty in France continues to weigh on the euro after French President Macron called for early parliamentary elections last Sunday. The euro recovered from its worst levels Friday based on hawkish comments from ECB Governing Council members Centeno and Vaske, who signaled that the ECB would take its time before cutting interest rates again.
ECB Governing Council member Centeno said the ECB must be prudent in bringing interest rates to levels that neither stimulate nor constrain the economy, suggesting the ECB will take some time before cutting rates again.
ECB Governing Council member Vasle said, "There's a high probability that the process of cutting interest rates will be significantly slower than the process of hiking rates was."
Swaps are discounting the chances of a -25 bp rate cut by the ECB at 16% for the July 18 meeting and 63% for the September 12 meeting.
USD/JPY (^USDJPY) Friday rose by +0.18%. The yen tumbled to a 1-1/2 month low against the dollar Friday after the BOJ refrained from providing details of its plans to reduce bond buying until next month’s policy meeting, a dovish event. The yen recovered from its worst levels Friday after BOJ Governor Ueda said the size of cuts in its bond-buying will be "substantial." Also, Friday’s slide in equity markets has boosted some safe-haven demand for the yen.
As expected, the BOJ kept the overnight call rate unchanged between 0% and 0.1% and said it would specify its plan for bond buying at the July policy meeting.
BOJ Governor Ueda said the size of cuts in its bond-buying will be "substantial," and it's possible for the BOJ to raise interest rates at its July meeting depending on the data.
Japan Apr industrial production was revised downward by -0.8 points to -0.9% m/m from the previously reported -0.1% m/m.
The Japan Apr tertiary industry index rose +1.9% m/m, stronger than expectations of +0.4% m/m.
Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 46% for the July 31 meeting and at 52% for the September 20 meeting.
August gold (GCQ4) Friday closed up +31.1 (+1.34%), and July silver (SIN24) closed up +0.406 (+1.40%). Precious metals Friday closed moderately higher. Political uncertainty in France undercut European and US equity markets Friday, boosting safe-haven demand for precious metals. Also, Friday’s decline in government bond yields is bullish for precious metals. In addition, geopolitical tensions in the Middle East continue to support safe-haven demand for precious metals.
Gains in metals Friday were limited as the dollar index climbed to a 6-week high. Gold prices were also under pressure from a drop in inflation expectations, which reduced demand for gold as an inflation hedge after the 10-year breakeven inflation rate fell to a 5-1/4 month low Friday.
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.
