Dollar Finds Support and Gold Falls on Fed Rate Cut Projections

The dollar index (DXY00) today is up by +0.28%.  The dollar today is moderately higher on positive carryover from Wednesday when the FOMC projected only 25 bp of rate cuts this year compared to 75 bp of rate cuts back in March.  Gains in the dollar are limited after US May producer prices rose less than expected, and weekly initial unemployment claims unexpectedly rose to a nearly 10-month high, dovish factors for Fed policy.

US weekly initial unemployment claims unexpectedly rose +13,000 to a 10-month high of 242,000, showing a weaker labor market than expectations of a decline to 225,000.

US May PPI final demand unexpectedly eased to +2.2% y/y from +2.3% y/y in April, weaker than expectations of an increase of +2.5% y/y.  May PPI ex-food and energy unexpectedly eased to +2.3% y/y from +2.5% y/y in April, weaker than expectations of +2.5% y/y.

The markets are discounting the chances for a -25 bp rate cut at 10% for the July 30-31 FOMC meeting and 62% for the following meeting on Sep 17-18.

EUR/USD (^EURUSD) today is down by -0.23%.  Strength in the dollar today is weighing on the euro. The euro is also under pressure after today’s economic news showed an unexpected decline in Eurozone Apr industrial production.

Eurozone Apr industrial production unexpectedly fell -0.1% m/m versus expectations of a +0.2% m/m increase.

ECB Governing Council member Muller said Eurozone inflation could quicken again, and "in order to achieve our goal, interest rates presumably still need to stay above average for some time."

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 10% for the July 18 meeting and 56% for the September 12 meeting.

USD/JPY (^USDJPY) today is up by +0.25%.  Today, the yen is under pressure from a stronger dollar, long-liquidation, and position squaring ahead of Friday’s BOJ meeting results.  Losses in the yen are limited today due to falling T-note yields.  The markets expect no change to BOJ policy at the conclusion of Friday’s meeting, but the BOJ may discuss when it will begin cutting its bond purchases. 

The Japan Q2 BSI all industry business conditions survey improved to +0.4% q/q from 0.0% q/q in Q1.

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 5% for the June 14 meeting and at 62% for the July 31 meeting.

August gold (GCQ4) today is down -25.6 (-1.09%), and July silver (SIN24) is down -0.942 (-3.11%).  Precious metals today are moving lower, with silver falling sharply to a 4-week low.  Precious metals are under pressure today on negative carryover from Wednesday when the FOMC signaled only 25 bp rate cuts this year versus projections of 75 bp rate cuts back in March.  Also, strength in stocks today has curbed safe-haven demand for precious metals.  Gold prices also fell on a decline in inflation expectations, which reduces demand for gold as an inflation hedge after the 10-year breakeven inflation rate today fell to a 4-1/4 month low. 

On the positive side for precious metals are today’s US economic reports on weekly jobless claims and May producer prices, which were dovish for Fed policy.  Also, today’s decline in T-note yields is supportive of precious metals.  In addition, the collapse of ceasefire talks in Gaza Wednesday signals that the war will continue, which has boosted the safe-haven demand for precious metals.  

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