The dollar index (DXY00) on Wednesday tumbled to a 4-week low and finished down by -0.43%. Wednesday’s U.S. May PPI report showed an easing of producer price pressures that knocked T-note yields lower and weighed on the dollar. The dollar recovered from its worst levels after the FOMC raised its median fed funds forecast for this year to 5.6% from 5.1%, signaling another 50 bp of rate hikes this year.
U.S. May PPI final demand eased to +1.1% y/y from +2.3% y/y in April, better than expectations of +1.5% y/y and the slowest pace of increase in more than two years. Also, May PPI ex-food and energy eased to +2.8% y/y from +3.1% y/y in April, better than expectations of +2.9% y/y and the slowest pace of increase in more than two years.
The FOMC voted 12-0 to maintain the fed funds target range at 5.00%-5.25% and said, "holding the target range steady at this meeting allows the committee to assess additional information and its implication for monetary policy."
New quarterly Fed forecasts show the median projection of the fed funds rate rising 5.6% by year-end, up from the previous projection of 5.1%, signaling another 50 bp of rate hikes this year.
The FOMC raised its 2023 U.S. real GDP central tendency range to 0.7%-1.2% from a March projection of 0.0%-0.8% and raised its 2023 core PCE range to 3.6%-4.5% from a March estimate of 3.5%-4.1%.
Fed Chair Powell said nearly all FOMC members expect further tightening this year as inflation pressures continue to run high and labor demand substantially exceeds the supply of workers.
EUR/USD (^EURUSD) on Wednesday rose by +0.34% and climbed to a 4-week high. The euro saw support from dollar weakness and a strong Eurozone industrial production report. In addition, central bank divergence is positive for EUR/USD as the Fed paused raising interest rates at Wednesday’s FOMC meeting, and the ECB is expected to raise interest rates b +25 bp on Thursday.
Eurozone Apr industrial production rose +1.0% m/m, slightly stronger than expectations of +0.9% m/m.
The German May wholesale price index fell -2.6% y/y, the largest decline in nearly three years.
USD/JPY (^USDJPY) on Wednesday fell by -0.24%. The yen moved higher Wednesday as a decline in T-note yields is bullish for the yen. The yen fell back from its best levels after the FOMC signaled it would raise interest rates by another 50 bp this year. Also, expectations for the BOJ to maintain stimulus measures after this Friday’s policy meeting are bearish for the yen.
August gold (GCQ3) on Wednesday closed up +10.30 (+0.53%), and July silver (SIN23) closed up +0.283 (+1.19%). Precious metals Wednesday posted moderate gains. Bullish factors included the decline in the dollar index to a 4-week low and lower T-note yields. In addition, metals moved higher after the easing of price pressures in Wednesday’s U.S. May PPI report was dovish for Fed policy.
Gold prices fell back about -$8.00 an ounce from their Wednesday afternoon closing level after the FOMC signaled it would continue raising interest rates this year despite holding rates steady at Wednesday’s 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.
