The dollar index (DXY00) on Wednesday rose by +0.12% and posted a 2-week high. On Wednesday, the dollar recovered from early losses and moved higher after stocks gave up an early advance and turned lower, which boosted liquidity demand for the dollar. The dollar on Wednesday initially moved lower as Fed-friendly U.S. economic reports on Nov ADP employment and Q3 nonfarm productivity undercut the dollar.
Wednesday’s U.S. economic news was dovish for Fed policy and bearish for the dollar. The Nov ADP employment change rose +103,000, weaker than expectations of +130,000. Also, Q3 nonfarm productivity was revised upward to 5.2% from 4.7%, better than expectations of 4.9% and the most in three years. In addition, Q3 unit labor costs were revised downward to -1.2% from the previously reported -0.8%, a bigger decline than expectations of -0.9%.
The markets are discounting a 1% chance for a +25 bp rate hike at the next FOMC meeting on Dec 12-13 FOMC and a 0% chance for that +25 bp rate hike at the following FOMC meeting on Jan 30-31, 2024. The markets are then discounting a 70% chance for a -25 bp rate cut at the March 19-20, 2024, FOMC meeting and are more than discounting (139%) that -25 bp rate cut at the Apr 30-May 1, 2024, FOMC meeting.
EUR/USD (^EURUSD) on Wednesday fell by -0.31% and posted a 3-week low. The euro was under pressure Wednesday from weaker-than-expected economic reports on Eurozone Oct retail sales and German Oct factory orders. Losses in EUR/USD were limited on hawkish comments from ECB Governing Council members Kazaks and Kazimir, who pushed back against speculation the ECB will cut interest rates early next year.
Eurozone Oct retail sales rose +0.1% m/m, weaker than expectations of +0.2% m/m.
German Oct factory orders unexpectedly fell -3.7% m/m, weaker than expectations of +0.2% m/m.
The German Nov S&P construction PMI fell -2.1 to 36.2, the weakest level since the data series began in 2020.
ECB Governing Council member Kazaks said given the current economic outlook and medium-term projection baseline, there's no need for ECB rate cuts in the first half of 2024.
ECB Governing Council member Kazimir said, "Incoming inflation data support the idea that additional ECB tightening won't be needed. However, expecting a rate cut in Q1 of 2024 is science fiction."
Swaps tied to ECB meeting dates have now priced in a 75% chance that the ECB will reduce its benchmark rate by -25 bp at the March 7 meeting.
USD/JPY (^USDJPY) on Wednesday rose by +0.15%. The yen on Wednesday posted modest losses. Wednesday’s +2% rally in the Nikkei Stock Index curbed safe-haven demand for the yen. Also, dovish comments Wednesday from BOJ Deputy Governor Himino weighed on the yen when he said the BOJ would patiently continue its easy monetary policy until a stable inflation target was in sight. A decline in the T-note yields limited losses in the yen on Wednesday.
February gold (GCG4) Wednesday closed up +11.60 (+0.57%), and Mar silver (SIH24) closed down -0.318 (-1.30%). Gold and silver prices Wednesday settled mixed, with silver falling to a 1-1/2 week low. Wednesday’s rally in the dollar index was bearish for metals. However, Wednesday’s decline in global bond yields boosted gold prices. Also, Wednesday’s weaker-than-expected report on U.S. Nov ADP employment is dovish for Fed policy and supportive of gold. Gains in gold were limited as a slump in the 10-year breakeven inflation rate Wednesday to a 6-month low has curbed demand for gold as an inflation hedge.
On Wednesday, silver prices were under pressure on the weaker-than-expected U.S. ADP employment and German factory orders reports, which signaled weak demand for industrial metals. Also, hawkish comments Wednesday from ECB Governing Council members Kazaks and Kazimir were bearish for precious metals when they pushed back against speculation the ECB will cut interest rates early next year.
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.
