The dollar index (DXY00) on Wednesday fell -0.46% on bearish technical sentiment, with the dollar index knocking on the door of last week’s 5-week low. The forex market remains focused on monetary policy differentials, with the ECB and Bank of England continuing to raise interest rates while the Fed is on pause for the time being.
The dollar on Wednesday shook off bullish factors, including hawkish comments from Fed Chair Powell and a sell-off in stocks. There were no U.S. economic reports on Wednesday.
Fed Chair Powell, in his semi-annual testimony Wednesday, made comments that were broadly in line with his comments last week after the FOMC meeting. Mr. Powell said Wednesday the Fed believes that higher interest rates will be needed to curb inflation. He said the Fed remains “strongly committed to bringing inflation back down to our 2% goal.” However, he said the Fed is making decisions “meeting by meeting,” which means that a rate hike is not guaranteed at the next meeting.
The FOMC last week left its funds rate target unchanged at 5.00%/5.25%, pausing after 15 straight months of rate hikes. However, the FOMC last week raised the median forecast for the funds rate target in its dot plot to 5.6%, which implies a further +50 bp rate hike from the current effective federal funds rate of 5.07%. The markets are discounting the odds at 72% that the FOMC, at its next meeting on July 25-26, will raise its funds rate target by +25 bp, down from 74% odds late Tuesday.
Meanwhile, Atlanta Fed President Bostic on Wednesday was less hawkish when he said that the “bar is higher” to justify still-higher rates. He said he supports an unchanged rate and that it is prudent to give time for inflation to respond to past rate hikes.
EUR/USD (^EURUSD) Wednesday rose by +0.61%, and USD/JPY (^USDJPY) rose +0.28%. GBP/USD (^GBPUSD) rose slightly by +0.08% after a surprisingly strong UK inflation report boosted the chances for an aggressive rate hike by the Bank of England at its policy meeting on Thursday. The markets are fully expecting a +25 bp rate hike by the BOE on Thursday, with a 37% chance of a larger 50 bp rate hike.
The UK May CPI rose +0.7% m/m and +8.7% y/y, stronger than expectations of +0.5% m/m and +8.4% y/y. The UK May core CPI rose +7.1% y/y, stronger than expectations of +6.8% y/y and April’s report of +6.8% y/y. The 10-year UK gilt yield Wednesday rose by +7 bp to 4.41%.
August gold (GCQ3) Wednesday closed down -2.80 (-0.14%), and July silver (SIN23) closed down -0.424 (-1.82%). Precious metals prices fell on Fed Chair Powell’s hawkish bias and failed to gain much support from the weaker dollar. Silver fell on continued concern about the lackluster global economic outlook.
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.
