The dollar index (DXY00) Wednesday tumbled to a 14-month low and finished down by -0.12%. The dollar sank Wednesday after the FOMC cut the fed funds rate by 50 bp and projected another 50 bp of rate cuts by the end of the year. The dollar was also undercut after the Fed cut its 2024 US GDP forecast and cut its 2024 core PCE price forecast, dovish factors for Fed policy. The dollar recovered from its worst levels after Fed Chair Powell said the Fed is in no rush to ease monetary policy.
The FOMC voted 11-1 to cut the fed funds target range by 50 bp to 4.75%-5.00% and said the committee is "strongly committed to supporting maximum employment" and returning inflation to its 2% goal.
The FOMC cut its 2024 US GDP forecast to 2.0% from 2.1% in June and cut its 2024 core PCE estimate to 2.6% from 2.8% in June. The FOMC also raised its 2024 unemployment forecast to 4.4% from 4.0% in June.
The FOMC cut its fed funds forecast for the end of 2024 to 4.375% from 5.125% in June, implying another 50 bp of rate cuts by the end of the year.
Fed Chair Powell said, "We made a good, strong start" by cutting rates by 50 bp today, and the Fed is "squarely focused" on its dual mandate of inflation and employment. He added that the Fed is not in a rush to ease policy and "we will move as fast or as slow" as policymakers consider appropriate based on the data.
US Aug housing starts rose +9.6% m/m to a 4-month high of 1.356 million, stronger than expectations of 1.318 million. Aug building permits, a proxy for future construction, rose +4.9% m/m to a 5-month high of 1.475 million, stronger than expectations of 1.410 million.
The markets are discounting the chances at 100% for a -25 bp rate cut at the November 6-7 FOMC meeting and a 36% chance for a -50 bp rate cut at that meeting.
EUR/USD (^EURUSD) Wednesday rose by +0.11% and posted a 3-week high. Wednesday's weakness in the dollar supported gains in the euro. Also, Wednesday’s jump in the 10-year German bund yield to a 1-week high strengthened the euro’s interest rate differentials. Dovish comments Wednesday from ECB Governing Council member Villeroy de Galhau limited gains in the euro when he said the ECB should continue to cut interest rates.
ECB Governing Council member Villeroy de Galhau said, "The ECB has cut interest rates twice and should continue to cut them," as victory over inflation is "within sight."
Swaps are discounting the chances of a -25 bp rate cut by the ECB at 25% for the October 17 meeting and at 100% for that 25 bp rate cut at the December 12 meeting.
USD/JPY (^USDJPY) today is down by -0.14%. Central bank divergence boosted the yen as the Fed began cutting interest rates Wednesday, while the BOJ is expected to keep raising rates. Gains in the yen were subdued due to Wednesday’s weaker-than-expected Japanese machine orders and trade reports. The yen fell back from its best levels Wednesday after T-note yields reversed losses and moved higher.
Japan's July core machine orders unexpectedly fell -0.1% m/m, weaker than expectations of +0.5% m/m.
Japan's trade news today was weaker than expected as Aug exports rose +5.6% y/y, below expectations of +10.6% y/y. Also, Aug imports rose +2.3% y/y, below expectations of +15.0% y/y.
Swaps are pricing in the chances for a +10 bp rate hike by the BOJ at 0% for the September 20 meeting and at +8% for the October 30-31 meeting.
December gold (GCZ24) Wednesday closed up +6.20 (+0.24%), and December silver (SIZ24) closed down -0.292 (-0.94%). Precious metals Wednesday settled mixed. Wednesday’s fall in the dollar index to a 14-month low was bullish for metals. Also, Wednesday’s action by the FOMC to cut interest rates by 50 bp boosted demand for precious metals as a store of value. In addition, dovish comments Wednesday from ECB Governing Council member Villeroy de Galhau lifted gold prices when he said the ECB should continue to cut interest rates. Silver also garnered support from Wednesday’s stronger-than-expected US Aug housing starts and building permits report, which was positive for industrial metals demand.
Gold prices jumped about $20 per ounce in post-market trading Wednesday afternoon after the FOMC cut the fed funds rate by 50 bp and projected another 50 bp of rate cuts by the end of the year. However, gold prices gave up their post-market gains when Fed Chair Powell said the Fed was in no rush to ease monetary policy.
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.
