The dollar index (DXY00) on Thursday rose by +0.33% due to hawkish global central banks and a +7.4 bp rise in the 10-year T-note yield to 3.793%. The dollar also saw support from U.S. economic reports that were mildly stronger than expected overall.
EUR/USD (^EURUSD) fell by -0.27%, while USD/JPY (^USDJPY) rose by +0.92%. GBP/USD (^GBPUSD) fell by -0.18% despite Thursday’s larger-than-expected BOE rate hike of +50 bp.
The Bank of England on Thursday surprised the markets with a +50 bp rate hike to 5.00% to address the rise in the UK May CPI to +8.7% y/y. The markets had been fully expecting a +25 bp BOE rate hike, but only a modest chance of a +50 bp rate hike. In addition, Norway’s central bank raised its benchmark rate by +50 bp to 3.75% and said the rate will “most likely be raised further in August.” The Swiss central bank raised its key rate by +25 bp to 1.75%.
The second day of Fed Chair Powell’s semi-annual testimony before Congress was generally uneventful. Mr. Powell reiterated that the Fed believes higher interest rates will be needed to curb inflation. He said the Fed remains “strongly committed to bringing inflation back down to our 2% goal.” However, he said the Fed is making decisions “meeting by meeting,” which means that a rate hike is not guaranteed for the next meeting.
The FOMC last week left its funds rate target unchanged at 5.00%/5.25%, pausing after 15 straight months of rate hikes. However, the FOMC last week raised the median forecast for the funds rate target in its dot plot to 5.6%, which implies a further +50 bp rate hike from the current effective federal funds rate of 5.07%. The markets are discounting the odds at 74% that the FOMC, at its next meeting on July 25-26, will raise its funds rate target by +25 bp, up from 69% odds late Wednesday.
Consistent with the Fed’s main theme, Fed Governor Michelle Bowman Thursday said, “I believe that additional policy-rate increases will be necessary to bring inflation down to our target over time.”
Thursday’s U.S. initial unemployment claims report was slightly weaker than expectations, with the initial claims series remaining unchanged from last week’s revised 1-3/4 year high of 264,000. That showed a slightly weaker labor market than expectations for a small decline to 259,000. Meanwhile, continuing claims fell -13,000 to 1.759 million, which showed a stronger labor market than expectations for an increase to 1.785 million.
The May U.S. existing home sales report of +0.2% to 4.30 million units was stronger than expectations for a decline to 4.25 million units. Existing home sales remain generally weak due to a lack of homes available for sale. Redfin on Wednesday reported that the number of homes for sale in the U.S. fell to a record low in May.
The May U.S. leading economic indicator report of -0.7% m/m was slightly stronger than expectations of -0.8% m/m but was weaker than April’s decline of -0.6%.
The U.S. Q1 current account deficit of -$219.3 billion was slightly wider than expectations of -$218.0 billion and widened from the revised Q4 level of -$216.2 billion. The report was slightly bearish for the dollar.
Thursday’s June French confidence report was a bit stronger than expected and was supportive of the euro. The French June business confidence index was unchanged at 100, in line with market expectations and unchanged from May. The French June manufacturing confidence index rose +2 points to 101 from 99 in May and was slightly stronger than market expectations of 98. The French production outlook indicator rose by +1 point to -9 from -10 in May, which was stronger than expectations for a decline to -11.
August gold (GCQ23) Thursday closed down -21.20 (-1.09%), and July silver (SIN23) closed down -3.43 (-1.50%). Precious metals prices Thursday continued lower on the Fed’s hawkish bias and the BOE’s +50 bp rate hike. Silver also fell on concern about hawkish global central banks and the lackluster global economic outlook.
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.
