The dollar index (DXY00) Monday rose by +0.24% and posted a 3-1/2 week high. The dollar moved higher Monday on carryover support from last Friday’s stronger-than-expected US May payroll report, which curbed expectations for Fed rate cuts. Also, higher T-note yields on Monday strengthened the dollar’s interest rate differentials.
The markets are discounting the chances for a -25 bp rate cut at 1% for the June 11-12 FOMC meeting, 8% for the following meeting on July 30-31, and 50% for the meeting after that on Sep 17-18.
EUR/USD (^EURUSD) on Monday fell by -0.33% and posted a 1-month low. Eurozone economic concerns weighed on EUR/USD after Italy’s industrial production unexpectedly declined. Also, heightened political uncertainty in Europe is undercutting the euro after French President Macron and German Chancellor Scholz’s parties were trounced by far-right parties in European elections on Sunday.
The euro found support Monday from the increase in the Eurozone Sentix investor confidence index to a 2-1/4 year high. Also, hawkish comments from ECB President Lagarde and ECB Governing Council members Kazimir and Nagel were bullish for the euro when they said they favored waiting before cutting interest rates again.
The Eurozone Jun Sentix investor confidence index rose +3.9 to a 2-1/4 year high of 0.3, stronger than expectations of -1.7.
Italy's Apr industrial production unexpectedly fell -1.0% m/m, weaker than expectations of +0.2% m/m.
ECB President Lagarde said last week's cut in interest rates by the ECB "doesn't mean interest rates are on a linear declining path and that there might be periods when we keep interest rates on hold."
ECB Governing Council member Kazimir said ECB policymakers haven't yet beaten the "inflation beast" and ruled out another rate cut in July and said "September will be a pivotal month" when new forecasts are due and "will be the right moment to reassess our stance and decide whether we need to cut rates of not."
ECB Governing Council member and Bundesbank President Nagel said the ECB may not cut interest rates again for a while as it watches to see how quickly inflation recedes to its 2% target.
Swaps are discounting the chances of a -25 bp rate cut by the ECB at 6% for the July 18 meeting and 48% for the September 12 meeting.
USD/JPY (^USDJPY) Monday rose by +0.20%. The yen dropped to a 1-week low against the dollar Monday. Weak Japanese economic news weighed on the yen after Q1 Japan GDP was revised lower, and the May eco-watchers outlook survey unexpectedly fell -2.2 to a 1-3/4 year low. Also, the yen was under pressure Monday from higher T-note yields.
Japan Q1 GDP was revised upward by +0.2 to -1.8% (q/q annualized) from the previously reported -2.0%.
The Japan May eco-watchers outlook survey unexpectedly fell -2.2 to a 1-3/4 year low of 46.3, weaker than expectations of an increase to 49.0.
Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 8% for the June 14 meeting and at 66% for the July 31 meeting.
August gold (GCQ4) Monday closed up +2.00 (+0.09%), and July silver (SIN24) closed up +0.434 (+1.47%). Precious metals Monday closed higher. Metals prices are consolidating ahead of the 2-day FOMC meeting that begins Tuesday. Heightened geopolitical risks in the Middle East continue to boost safe-haven demand for precious metals. Silver prices garnered some carryover support Monday from a +1% rally in copper prices.
Monday’s rally in the dollar index to a 3-1/2 week high was bearish for metals prices. Also, higher global government bond yields Monday were negative for precious metals. In addition, hawkish comments Monday from ECB President Lagarde and ECB Governing Council members Kazimir and Nagel undercut precious metals when they said they favored waiting before cutting interest rates again. Finally, expectations that the Fed will not cut interest rates at the conclusion of Wednesday’s 2-day FOMC meeting are bearish for gold.
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.
