The dollar index (DXY00) on Wednesday tumbled by -1.04% and posted a 1-1/2 week low. The dollar sank Wednesday after the FOMC left the fed funds target rate unchanged for the third consecutive meeting and forecasted 75 bp of interest rate cuts for next year. A plunge in Treasury yields on Wednesday weighed on the dollar, and a sharp rally in stocks also curbed liquidity demand for the dollar. In addition, Wednesday’s weaker-than-expected U.S. Nov PPI report is dovish for Fed policy and bearish for the dollar.
The markets are discounting a 14% chance for a -25 bp rate cut at the Jan 30-31, 2024, FOMC meeting. The markets are then discounting an 85% chance for that same -25 bp rate cut at the March 19-20, 2024, FOMC meeting and are discounting a 73% chance of -50 bp of rate cuts by the April 30-May 1, 2024, FOMC meeting.
U.S. Nov PPI final demand eased to +0.9% y/y from +1.2% y/y in Oct, better than expectations of +1.0% y/y and the slowest pace of increase in 5 months. Also, Nov PPI ex-food and energy eased to +2.0% y/y from +2.3% y/y in Oct, better than expectations of +2.2% and the slowest pace of increase in 2-3/4 years.
The FOMC voted 12-0 to leave the fed funds target rate unchanged at 5.25%-5.50% for the third consecutive meeting and said that "inflation has eased over the past year but remains elevated." The FOMC raised its 2023 GDP estimate to 2.6% from 2.1% in Sep and lowered its 2023 core PCE estimate to 3.2% from 3.7% in Sep.
The FOMC lowered its median interest rate forecast for the fed funds rate at the end of 2024 to 4.625% from a Sep estimate of 5.125%, implying 75 bp of rate cuts next year.
Fed Chair Powell said inflation has eased but is still too high and that inflation easing without a spike in unemployment is good news. He also said he believes the policy rate is at or near the peak for this cycle and that policymakers discussed the timing of rate cuts.
EUR/USD (^EURUSD) on Wednesday rose by +0.69% and posted a 1-1/2 week high. The euro on Wednesday recovered from early losses and moved higher after the dollar plunged on the Fed’s dovish forecast for interest rate cuts next year. The euro Wednesday initially moved lower on economic concerns after news showed Eurozone Oct industrial production fell more than expected. Also, position squaring ahead of the results of Thursday’s ECB meeting weighed on the euro.
Eurozone Oct industrial production fell -0.7% m/m, weaker than expectations of -0.3% m/m.
Swaps tied to ECB meeting dates have now priced in a 55% chance that the ECB will reduce its benchmark rate by -25 bp at the March 7 meeting.
USD/JPY (^USDJPY) on Wednesday fell by -1.68%. The yen surged Wednesday against the dollar after T-note yields plunged when the FOMC signaled an end to its tightening cycle and put forward a more aggressive forecast for monetary easing for 2024. Wednesday’s stronger-than-expected Q4 Japan Tankan large manufacturer’s sentiment index also supported the yen.
The Japan Q4 Tankan sentiment of large manufacturers rose +3 to 12, stronger than expectations of 10.
February gold (GCG4) Wednesday closed +4.10 (+0.21%), and Mar silver (SIH24) closed -0.095 (-0.41%). Gold and silver prices Wednesday settled mixed, with silver falling to a 1-month low. Wednesday's weaker dollar and lower global bond yields were bullish factors for precious metals. Silver prices were under pressure from industrial metals demand concerns after the Eurozone's October industrial production fell more than expected.
Gold prices jumped over $30 an ounce after the close of metals trading Wednesday afternoon when the FOMC signaled 75 bp of interest rate cuts for next year, and Fed Chair Powell said he believes the policy rate is at or near the peak for this cycle.
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.
