The dollar index (DXY00) on Wednesday recovered from early losses and rose +0.11%. The dollar on Wednesday opened lower on weaker T-note yields and on strength in stocks that curbed liquidity demand for the dollar. However, the dollar recovered its losses and moved higher after the FOMC's dot plot of interest rate projections showed policymakers still foresee one more rate hike this year and raised the median fed funds target for 2024 and 2025 by 50 bp.
The FOMC, as expected, unanimously voted to hold the fed funds target range unchanged at 5.25% to 5.50%, but 12 of 19 policymakers are expecting one more 25 bp rate hike this year.
The FOMC's dot plot of interest rate projections shows policymakers still foresee one more rate hike this year, but the median fed funds target for 2024 was raised to 5.125% from 4.625% in June, and for 2025 the median fed funds target was raised to 3.875% from 3.375% in June, signaling the Fed expects interest rates to stay higher for longer.
The dollar also found support after the FOMC raised its 2023 U.S. GDP forecast and cut its unemployment and inflation forecasts. The FOMC's median projection for U.S. economic growth in 2023 was raised to +2.1% from +1.0% in June. Also, the 2023 unemployment rate estimate was lowered to 3.8% from a June forecast of 4.1%. In addition, the 2023 core PCE inflation estimate was lowered to 3.7% from a June forecast of 3.9%.
EUR/USD (^EURUSD) on Wednesday fell by -0.10%. The euro Wednesday gave up early gains and turned lower after the dollar recovered Wednesday afternoon on the hawkish FOMC pause. EUR/USD Wednesday initially moved higher on signs of strength in the Eurozone economy after Eurozone Aug new car registrations posted their largest increase in 5 months, and Eurozone Jul construction output rose by the most in 5 months.
Eurozone Aug new car registrations rose +21.0% y/y to 788,000 units, the biggest increase in 5 months.
Eurozone Jul construction output rose +0.8% m/m, the biggest increase in 5 months.
An easing of price pressures is dovish for ECB policy and bearish for EUR/USD after the German Aug PPI fell -12.6% y/y, weaker than expectations of -12.5% y/y and the largest decline since the data series began in 1977.
USD/JPY (^USDJPY) on Wednesday rose +0.16%. The yen on Wednesday gave up an early advance and dropped to a 10-1/2 month low against the dollar. Central bank divergence continues to weigh on the yen with the ECB, BOE, and the Fed in the midst of rate hiking cycles while the BOJ maintains record low interest rates. The yen Wednesday initially moved higher on better-than-expected Japanese trade news and lower T-note yields. However, T-note yields gave up their declines and moved higher on the hawkish FOMC pause, which weighed on the yen.
Japanese trade news supported the yen after Japan Aug exports fell -0.8% y/y, a smaller decline than expectations of -2.1% y/y. Also, Aug imports fell -17.8% y/y, the biggest decline in three years but a smaller decline than expectations of -20.0% y/y.
October gold (GCV3) on Wednesday closed +13.30 (+0.69%), and Dec silver (SIZ23) closed up +0.380 (+1.62%). Precious metals prices Wednesday closed moderately higher, with gold and silver posting 2-week highs. A weaker dollar Wednesday was bullish for metals. Also, lower global bond yields on Wednesday were supportive of precious metals. Gains in gold were limited by long liquidation pressures after long gold holdings in ETFs fell to a 3-1/2 year low on Tuesday.
Precious metals prices gave up more than half of their advance Wednesday afternoon in after-hours trading after the Federal Reserve signaled higher interest rates for longer following the 2-day FOMC meeting.
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.
