The dollar index (DXY00) Tuesday fell slightly by -0.04%. The dollar Tuesday gave up overnight gains and turned lower as T-note yields fell on the weaker-than-expected US May retail sales report. Also, Tuesday’s rally in the S&P 500 to a new record high curbed liquidity demand for the dollar.
The dollar Tuesday initially moved higher based on comments from New York Fed President Williams, who said the US economy is "moving in the right direction." Comments from other Fed presidents Tuesday were hawkish and supported the dollar as well after St. Louis Fed President Musalem, Boston Fed President Colins, Dallas Fed President Logan, and Richmond Fed President Barkin said the Fed needs more data before it can cut interest rates. Also, Tuesday’s stronger-than-expected report on US Apr manufacturing production was bullish for the dollar.
US May retail sales rose +0.1% m/m, weaker than expectations of +0.3% m/m. Also, Apr retail sales were revised downward to -0.2% m/m from the previously reported unchanged m/m.
US May manufacturing production rose +0.9% m/m, stronger than expectations of +0.3% m/m.
New York Fed President Williams said the US economy is "moving in the right direction" but needs more data before the Fed can cut interest rates.
Fed Governor Kugler said, "If the economy evolves as I am expecting, it will likely become appropriate to begin easing policy sometime later this year."
St. Louis Fed President Musalem said US interest rate cuts could be delayed for some time, and its likely to take "quarters," not months, to see data support a reduction.
Dallas Fed President Logan said, "From a monetary policy perspective, we're in a good position; we're in a flexible position to watch the data and be patient. We're going to need to see several months of that data to really have confidence in our outlook that we're headed to 2% on inflation."
Boston Fed President Collins said, "It is too soon to determine whether inflation is durably on a path back to the 2% target, and this process may just take more time than previously thought."
Richmond Fed President Barkin said recent US inflation figures are "very encouraging," but he'd like to see continued progress toward the Fed's 2% goal.
The markets are discounting the chances for a -25 bp rate cut at 8% for the July 30-31 FOMC meeting and 65% for the following meeting on Sep 17-18.
EUR/USD (^EURUSD) Tuesday rose by +0.03%. The euro on Tuesday recovered from early losses and moved slightly higher on hawkish comments from ECB Vice President Guindos, who said the ECB’s economic forecasts in September will be the next time the ECB debates about cutting interest rates. The euro Tuesday initially moved lower on the weaker-than-expected German Jun ZEW survey of economic growth.
The German Jun ZEW survey expectations of economic growth rose +0.4 to a 2-1/3 year high of 47.5, weaker than expectations of 50.0.
ECB Vice President Guindos said, "ECB forecasts are updated every three months, and the next one is in September. The forecasts are an important indicator at the time of deciding how interest rates will evolve."
Swaps are discounting the chances of a -25 bp rate cut by the ECB at 6% for the July 18 meeting and 61% for the September 12 meeting.
USD/JPY (^USDJPY) on Tuesday rose by +0.04%. The yen remains under pressure as Japan’s government bond yields are well below those of other G-7 countries. Losses in the yen were limited by Tuesday’s comments from BOJ Governor Ueda, who said that an interest rate hike is possible at next month’s BOJ meeting. Tuesday’s decline in T-note yields was also supportive of the yen.
BOJ Governor Ueda said, "There is a good chance for the policy rate to be raised in July, depending on data and information on the economy, inflation, and financial conditions."
Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 32% for the July 31 meeting and at 61% for the September 20 meeting.
August gold (GCQ4) Tuesday closed up +17.90 (+0.77%), and July silver (SIN24) closed up +0.173 (+0.59%). Precious metals Tuesday found support from a weaker dollar. Also, Tuesday’s decline in global bond yields supports precious metals. In addition, Tuesday’s report on US May retail sales was below expectations, a dovish factor for Fed policy and bullish for precious metals. Silver garnered support from Tuesday’s stronger-than-expected US May manufacturing production report, a positive factor for industrial metals demand and silver prices.
Hawkish central bank comments Tuesday limited gains in precious metals. New York Fed President Williams, St. Louis Fed President Musalem, Boston Fed President Colins, Dallas Fed President Logan, and Richmond Fed President Barkin said the Fed needs more data before it can cut interest rates. Also, ECB Vice President Guindos said the ECB should wait until its September economic projections before deciding on whether to cut interest rates. In addition, BOJ Governor Ueda said that an interest rate hike is possible at next month’s BOJ meeting. Finally, Tuesday’s rally in the S&P 500 to a new all-time high reduced safe-haven demand for precious 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.
