The dollar index (DXY00) on Thursday fell by -0.86%. The dollar on Thursday extended Wednesday’s sharp losses to a 4-1/4 month low. The dollar is under pressure after the Fed on Wednesday signaled an end to monetary tightening and projected interest rate cuts for next year. Also, Thursday’s slump in T-note yields has weakened the dollar’s interest rate differentials. In addition, Thursday’s rally in stocks has curbed liquidity demand for the dollar.
Thursday’s U.S. economic news was better than expected and bullish for the dollar. Weekly initial unemployment claims unexpectedly fell -19,000 to an 8-week low of 202,000, showing a stronger labor market than expectations of no change at 220,000. Also, Nov retail sales unexpectedly rose +0.3% m/m, stronger than expectations of -0.1% m/m.
The markets are discounting an 18% chance for a -25 bp rate cut at the Jan 30-31, 2024, FOMC meeting. The markets then discount a 92% chance for that same -25 bp rate cut at the March 19-20, 2024, FOMC meeting.
EUR/USD (^EURUSD) on Thursday rose by +1.08%. The euro on Thursday added to Wednesday’s gains and posted a 2-week high. Thursday’s slump in the dollar was supportive of the euro. Gains in the euro accelerated on hawkish comments from ECB President Lagarde, who said ECB policymakers did not discuss interest rate cuts at Thursday's meeting.
The ECB, as expected, kept its deposit rate unchanged at 4.00% and said it would accelerate its balance-sheet reduction by allowing some bonds maturing from its pandemic emergency purchase program (PEPP) to roll off before the end of next year. The ECB will reduce its PEPP portfolio by 7.5 billion euros a month on average over the second half of 2024 and intends to discontinue reinvestment under PEPP at the end of 2024.
The ECB cut its 2023 Eurozone GDP estimate to 0.6% from a Sep estimate of 0.7% and cut its 2023 core CPI estimate to 5.0% from 5.1%.
ECB President Lagarde said we don't yet have evidence of a sustainable slowdown in Eurozone growth, and policymakers did not discuss interest rate cuts at Thursday’s policy meeting.
Swaps tied to ECB meeting dates are discounting a 9% chance for a -25 bp rate cut at the January 25, 2024, ECB meeting and priced in a 64% chance that the ECB will reduce its benchmark rate by that same -25 bp at the March 7 meeting.
USD/JPY (^USDJPY) on Thursday fell by -0.69%. The yen on Thursday added to this week’s gains and posted a 4-1/2 month high against the dollar. Wednesday’s dovish FOMC meeting sparked short covering in the yen when the Fed signaled an end to its tightening cycle. Also, Thursday’s slump in T-note yields is bullish for the yen. In addition, Thursday’s stronger-than-expected Japanese economic reports on Oct core machine orders and Oct industrial production were positive for the yen.
Japan Oct core machine orders unexpectedly rose +0.7% m/m, stronger than expectations of -0.4% m/m.
Japan Oct industrial production was revised upward by +0.3 to +1.3% m/m from the initially reported +1.0% m/m.
February gold (GCG4) Thursday closed +47.60 (+2.38%), and Mar silver (SIH24) closed +1.465 (+6.39%). Gold and silver prices Thursday rallied sharply, with gold posting a 1-1/2 week high and silver climbing to a 1-week high. Thursday's slump in the dollar index to a 4-1/4 month low is bullish for metals. Also, Wednesday’s FOMC meeting supported precious metals after the Fed signaled an end to its rate hiking cycle and projected interest rate cuts for next year. In addition, lower global bond yields on Thursday are bullish factors for precious metals. Finally, the BOE and ECB's actions to leave interest rates unchanged Thursday have boosted demand for gold as a store of value.
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.
