The dollar index (DXY00) on Wednesday fell by -0.21%. Strength in the euro Wednesday weighed on the dollar after hawkish comments from ECB Executive Board member Schnabel pushed European government bond yields higher. Also, Wednesday’s rally in stocks curbed the liquidity demand for the dollar. The dollar was also under pressure on expectations for a friendly U.S. CPI report on Thursday, which could pave the way for Fed rate cuts.
The markets are discounting the chances for a -25 bp rate cut at 5% for the next FOMC meeting on Jan 30-31 and a 69% chance for that -25 bp rate cut for the following meeting on March 19-20.
EUR/USD (^EURUSD) on Wednesday rose by +0.36%. On Wednesday, the euro found support on positive Eurozone economic news after French Nov industrial production rose more than expected. Gains in EUR/USD accelerated Wednesday after ECB Executive Board member Schnabel said it is too early for the ECB to discuss interest rate cuts.
French Nov industrial production rose +0.5% m/m, stronger than expectations of no change m/m.
ECB Executive Board member Schnabel said, “It is too early to discuss rate cuts, and the ECB will keep its key policy rates at restrictive levels until we are confident that inflation will sustainably return to our 2% target. This requires additional data confirming the disinflationary process.”
ECB Vice President Guindos said the Eurozone may have experienced a downturn at the end of last year, and "incoming data indicate that the future remains uncertain, and the prospects are tilted to the downside."
Swaps are pricing in the chances for a -25 bp rate cut by the ECB at 3% for its next meeting on January 25 and 37% for the following meeting on March 7.
USD/JPY (^USDJPY) on Wednesday rose by +0.82%. On Wednesday, the yen retreated after weaker-than-expected Japanese wage reports bolstered the outlook for the BOJ to delay exiting its negative interest rate policy. Also, Wednesday’s rally in the Nikkei Stock Index to an almost 34-year high has curbed safe-haven demand for the yen. Losses in the yen accelerated Wednesday afternoon when T-note yields gave up an early decline and moved higher.
Japan Nov labor cash earnings rose +0.2% y/y, weaker than expectations of +1.5% y/y. Also, Nov real cash earnings fell -3.0% y/y, weaker than expectations of -2.0% y/y and the biggest decline in 7 months.
February gold (GCG4) Wednesday closed -5.20 (-0.26%), and Mar silver (SIH24) closed -0.025 (-0.11%). Precious metals on Wednesday closed moderately lower. Higher global bond yields on Wednesday weighed on precious metal prices. Also, on Wednesday, the hawkish comments from ECB Executive Board member Schnabel undercut precious metal prices when she said it was too early for the ECB to discuss interest rate cuts. Another negative factor for gold is the continued liquidation of long gold positions by funds after long gold holdings in ETFs fell to a nearly 4-year low Tuesday.
Losses in precious metals were limited by weaker-than-expected wage reports in Japan, which could prompt the BOJ from exiting its negative interest rate policy. Gold also has support on expectations for a friendly U.S. CPI report on Thursday, which could allow the Fed to begin cutting interest rates.
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.
