The dollar index (DXY00) on Wednesday rose by +0.04%. The dollar on Wednesday recovered from a 3-1/2 month low and posted modest gains. The dollar rebounded after Wednesday’s economic news showed Q3 GDP was revised higher than expected. Also, an easing of consumer price pressures in Germany and Spain is dovish for ECB policy and weighed on the euro to benefit the dollar. Strength in stocks on Wednesday curbed liquidity demand for the dollar and limited the dollar’s upside.
Wednesday’s U.S. economic news supported the dollar after Q3 GDP was revised upward by +0.3 to +5.2% (q/q annualized), stronger than expectations of +5.0%. The Q3 GDP price index was revised upward by +0.1 to 3.6%, stronger than expectations of no change at 3.5%, although the Q3 core PCE deflator was revised downward by -0.1 to 2.3%, weaker than expectations of no change at 2.4%.
Fed comments on Wednesday were mixed for the dollar. On the bullish side, Richmond Fed President Barkin said the Fed should keep the option to hike interest rates on the table in case inflation proves stubborn. Conversely, Cleveland Fed President Mester signaled she would support the Fed continuing to hold interest rates steady at the December FOMC meeting, and Atlanta Fed President Bostic said, "Our research and input from business leaders tell me the downward trajectory of inflation will likely continue."
The Fed Beige Book was dovish for Fed policy and bearish for the dollar as it said, "sales of discretionary items and durable goods, like furniture and appliances, declined, on average, as consumers showed more price sensitivity."
The markets are discounting a 4% 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 51% chance for a -25 bp rate cut at the March 19-20, 2024, FOMC meeting and a more than 100% chance for that same -25 bp rate cut at the Apr 30-May 1, 2024, FOMC meeting.
EUR/USD (^EURUSD) on Wednesday fell by -0.15%. The euro on Wednesday fell back from a 3-1/2 month high and posted moderate losses. A slowing of price pressures in Germany and Spain knocked European government bond yields lower Wednesday and weighed on the euro. EUR/USD on Wednesday initially climbed to a 3-1/2 month high on hawkish comments from ECB Governing Council member Stournaras, and after Eurozone Nov economic confidence rose more than expected to a 4-month high.
ECB Governing Council member Stournaras cautioned against premature bets on when the ECB will lower interest rates, saying, "The current numbers betting on a rate cut in April seem a bit optimistic."
Eurozone Nov economic confidence rose +0.3 to a 4-month high of 93.8, stronger than expectations of 93.6.
German Nov CPI (EU harmonized) eased to +2.3% y/y from +3.0% y/y in Oct, better than expectations of +2.5% y/y and the smallest pace of increase in nearly 2-1/2 years.
Spain Nov CPI (EU harmonized) unexpectedly eased to +3.2% y/y from +3.5% y/y in Oct, better than expectations of an increase to +3.7% y/y.
USD/JPY (^USDJPY) on Wednesday fell by -0.09%. The yen on Wednesday extended this week’s rally to a 2-1/2 month high against the dollar. A slump in T-note yields Wednesday boosted the yen. However, the yen fell back from its best levels on comments from BOJ member Adachi, who said his preference was to wait until at least April before the BOJ exits its ultra-easy monetary policy.
BOJ member Adachi indicated his preference to wait until at least April before the BOJ exits its ultra-easy monetary policy, saying, “We need to continue with easing patiently, and we’re not at a phase to discuss an exit strategy, given the current economy and inflation.”
December gold (GCZ3) Wednesday closed up +7.10 (+0.35%), and Dec silver (SIZ23) closed up +0.137 (+0.55%). Precious metals prices on Wednesday posted moderate gains, with gold climbing to a 6-1/2 month high and silver rising to a 4-1/2 month high. Precious metals rallied Wednesday on dovish Fed comments. Cleveland Fed President Mester signaled she would support the Fed continuing to hold interest rates steady at the December FOMC meeting, and Atlanta Fed President Bostic said the downward trajectory of inflation will likely continue. Also, Wednesday’s decline in global bond yields is bullish for precious metals. Silver prices have support after U.S. Q3 GDP was revised higher than expected, a positive factor for industrial metals demand. Wednesday’s rally in stocks is curbing safe-haven demand and limited gains in precious metals. Also, Wednesday’s recovery in the dollar to higher on the day from a 3-1/2 month low is bearish for metals.
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.
