The dollar index (DXY00) Tuesday fell by -0.44% and posted a new 7-1/2 month low. Lower T-note yields Tuesday weighed on the dollar. Also, the euro's strength undercut the dollar as EUR/USD rose to a 7-1/2 month high Tuesday. The dollar extended its losses Tuesday after Fed Governor Bowman said she supports Fed rate cuts if inflation keeps falling.
Fed Governor Bowman said, "Should the incoming data continue to show that inflation is moving sustainably toward our 2% goal, it will become appropriate to gradually lower the federal funds rate to prevent monetary policy from becoming overly restrictive."
The markets are discounting the chances at 100% for a -25 bp rate cut at the Sep 17-18 FOMC meeting and at 30% for a -50 bp rate cut at that meeting.
EUR/USD (^EURUSD) Tuesday rose by +0.33% and posted a 7-1/2 month high. The euro strengthened Tuesday after the Bundesbank’s hawkish monthly report said that comparatively high wage increases in the Eurozone will probably keep underlying inflation "at an elevated level." Gains in the euro were limited by dovish comments from ECB Governing Council member Rehn, who said the recent increase in negative growth risks in the Eurozone reinforced the case for a rate cut at the next ECB monetary meeting in September.
Eurozone June construction output rose +1.7% m/m, the largest increase in 17 months.
Germany’s July PPI fell -0.8% y/y, the thirteenth consecutive month prices have fallen year-over-year.
ECB Governing Council member Rehn said, "In my view, the recent increase in negative growth risks in the Eurozone has reinforced the case for a rate cut at the next ECB monetary meeting in September, provided that disinflation is indeed on track."
The Bundesbank said in its monthly report that "the high level of willingness to strike until recently and the still widespread labor shortage suggest that comparatively high wage increases will continue in the future." This will probably keep underlying inflation "at an elevated level."
Swaps are discounting the chances of a -25 bp rate cut by the ECB at 100% for the September 12 meeting.
USD/JPY (^USDJPY) Tuesday fell by -0.80%. The yen rallied moderately Tuesday and is just below Monday’s 1-1/2 week high against the dollar. The yen strengthened Tuesday after the BOJ released a pair of research papers highlighting the persistence of inflationary pressure in the Japanese economy, indicating the BOJ may continue to raise interest rates. Lower T-note yields Tuesday were also supportive of the yen.
Swaps are pricing in the chances for a +10 bp rate hike by the BOJ at 0% for the September 20 meeting and +9% for the October 30-31 meeting.
December gold (GCZ24) Tuesday closed up +9.30 (+0.37%), and September silver (SIU24) closed up +0.215 (+0.73%). Precious metals settled moderately higher on Tuesday, with Dec gold posting a contract high and nearest-futures (Q24) gold posting an all-time high of $2,527.30 an ounce. Silver prices posted a 1-month high.
Tuesday’s fall in the dollar index to a 7-1/2 month low was bullish for metals. Also, Tuesday’s decline in global bond yields supported precious metals prices. In addition, dovish central bank comments gave gold prices a boost. Fed Governor Bowman said she supports Fed rate cuts if inflation keeps falling, and ECB Governing Council member Rehn said negative growth risks in the Eurozone have reinforced the case for a rate cut at the next ECB monetary meeting in September.
Finally, safe-haven demand for precious metals remains strong on concern that Iran may yet attack Israel as retaliation for the recent assassination of a Hamas political leader in Tehran. Silver found support from Tuesday’s news that the Eurozone's June construction output rose +1.7% m/m, the largest increase in 17 months, a positive factor for industrial metals demand.
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.
