The dollar index (DXY00) today is up +0.22% on the slightly hawkish CPI report. The dollar index is also seeing support from today’s +3.9 bp rise in the 10-year T-note yield, which modestly improved the dollar’s interest rate differentials.
The dollar index is seeing support today after the markets slightly dialed back expectations for Fed rate cuts over the next several meetings after today’s CPI report.
Today’s headline Feb U.S. CPI report of +0.4% m/m was in line with market expectations. Meanwhile, the year-on-year CPI figure of +3.2% y/y was slightly stronger than market expectations of +3.1% and was up from Jan’s +3.1%, but was only 0.2 points above the 2-3/4 year low of +3.0% y/y posted in June 2023.
The Feb U.S. core (ex food and energy) CPI report of +0.4% m/m was slightly stronger than expectations of +0.3%. The core CPI year-on-year figure of +3.8% y/y was down from Jan’s +3.9% but was slightly stronger than market expectations of +3.7%. The Feb core CPI report of +3.8% y/y was a new 2-3/4 year low but was still far above the Fed’s +2.0% inflation target.
The slightly stronger-than-expected U.S. CPI report essentially confirmed that the FOMC at its meeting next week will not cut interest rates due to above-target inflation. However, the fact that the core CPI at least dipped to a 2-3/4 year low supported market hopes that the Fed could cut interest rates as soon as June. Fed Chair Powell said in Senate testimony last week that the Fed is “not far” from being confident enough to start cutting interest rates.
The markets are discounting the chances for a -25 bp rate cut at 1% for next week’s March 19-20 FOMC meeting, 13% for the following meeting on April 30-May 1, and 75% for the meeting after that on June 11-12.
EUR/USD (^EURUSD) today is down -0.13%. The euro was undercut by the dollar strength seen on the U.S. CPI report. The euro continues to be undercut by last Friday’s dovish comments from ECB Governing Council members Nagel and Villeroy de Galhau, who said the ECB could begin cutting interest rates in the spring. Also, ECB President Lagarde last week said that the ECB could start cutting rates as soon as June.
Swaps are pricing in the chances for a -25 bp rate cut by the ECB at 12% for its next meeting on April 11 and 91% for the following meeting on June 6.
USD/JPY (^USDJPY) is up +0.67%. The yen was undercut today after BOJ Governor Ueda said that Japan’s consumption of non-durable goods is weak, which may have dampened the chances for a rate hike at next week’s BOJ meeting.
Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 66% for next week’s meeting on March 19 and 81% for the following meeting on April 26.
April gold (GCJ4) is down -29.0 (-1.33%), and May silver (SIK24) is down -0.455 (-1.84%). April gold today fell back from last Friday’s contract high, and March gold fell back from last Friday’s all-time record nearest-futures high. Gold prices are seeing downward pressure from today’s slightly stronger-than-expected U.S. CPI report and today’s +3.9 bp rise in the 10-year T-note yield. Gold is also seeing downward pressure from today’s mild rise in the dollar index. Also, funds continue to liquidate their long gold positions after long gold holdings in ETFs fell to a 4-1/2 year low on Monday.
Gold has underlying support from market expectations that the Fed and ECB will begin cutting interest rates in June. Precious metals prices also have underlying support from Middle East geopolitical tensions.
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.
