The dollar index (DXY00) Thursday fell by -0.58% and posted a 1-month low. The dollar retreated Thursday after the weaker-than-expected US June CPI report bolstered speculation the Fed will be able to cut interest rates this year. Also, dovish comments Thursday from San Francisco Fed President Daly weighed on the dollar when she said recent data warrant a Fed rate cut. A supportive factor for the dollar was Thursday’s weekly jobless claims report that showed weekly US jobless claims fell to a 6-week low, a sign of strength in the labor market that is hawkish for Fed policy.
US June CPI eased to +3.0% y/y from +3.3% y/y in May, better than expectations of +3.1% y/y. The June CPI ex-food and energy eased to a 3-year low of +3.3% y/y from +3.4% y/y in May, better than expectations of no change at +3.4% y/y.
US weekly initial unemployment claims fell -17,000 to a 6-week low of 222,000, showing a stronger labor market than expectations of 235,000. Weekly continuing claims unexpectedly fell -4,000 to 1,852 million, showing a stronger labor market than expectations of an increase to 1.860 million.
San Francisco Fed President Daly said, "With the information we have received to date, which includes data on employment, inflation, GDP growth, and the outlook for the economy, I see it as likely that some policy adjustment will be warranted."
St. Louis Fed President Musalem said Thursday's June CPI report was "encouraging," but he "will be looking for more evidence that inflation can be expected to converge to 2% going forward."
The markets are discounting the chances for a -25 bp rate cut at 9% for the July 30-31 FOMC meeting
and 91% for the following meeting on Sep 17-18.
EUR/USD (^EURUSD) Thursday rose by +0.35% to a 1-month high. Thursday’s slump in the dollar boosted the euro. EUR/USD fell back from its best levels Thursday after the 10-year German bund yield fell to a 1-1/2 week low, which weakened the euro’s interest rate differentials.
Swaps are discounting the chances of a -25 bp rate cut by the ECB at 5% for the July 18 meeting and 80% for the September 12 meeting.
USD/JPY (^USDJPY) Thursday fell sharply by -1.82%. The yen jumped to a 3-week high against the dollar Thursday after the weaker-than-expected US CPI report knocked T-note yields lower and sparked short covering in the yen. Gains in the yen accelerated after TV Asahi reported that the Japanese government and BOJ intervened in the forex market Thursday to support the yen.
On the negative side for the yen was today’s unexpected decline in Japan’s May core machine orders, a dovish factor for BOJ policy. Also, today’s rally in the Nikkei Stock Index to a new record high curbed safe-haven demand for the yen.
Japan's May core machine orders unexpectedly fell -3.2% m/m, weaker than expectations of +0.8% m/m and the biggest decline in 6 months.
Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 56% for the July 31 meeting and 21% for the September 20 meeting.
August gold (GCQ4) Thursday closed up +42.20 (+1.77%), and September silver (SIU24) closed up +0.657 (+2.12%). Precious metals prices Thursday rallied moderately, with gold posting a 7-week high and silver posting a 6-week high. Thursday’s decline in the dollar to a 1-month low was supportive of metals. Also, Thursday’s weaker-than-expected US CPI report knocked bond yields lower and boosted expectations for the Fed to cut interest rates, a bullish factor for precious metals. The dollar maintained its losses Thursday on dovish comments from San Francisco Fed President Daly, who said recent economic data “warrants some policy adjustment,” signaling she favors cutting interest rates.
On the bearish side, a decline in inflation expectations reduces demand for gold as an inflation hedge after the US 10-year breakeven inflation rate fell to a 2-week low Thursday. A negative factor for silver was the unexpected decline in Thursday’s report on Japan's May core machine orders, a bearish 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.
