Dollar Slides as Weak US Economic News Bolsters Rate Cut Hopes

The dollar index (DXY00) Wednesday fell by -0.33% and posted a 3-week low.  The dollar came under pressure Wednesday on weaker-than-expected US labor market news that showed a smaller-than-expected increase in the Jun ADP employment and a jump in weekly continuing unemployment claims to a 2-1/2 year high, a dovish factor for Fed policy.  Also, a widening of the US trade deficit in May to a 19-month high is bearish for the dollar.  Losses in the dollar accelerated after the Jun ISM services index contracted by the most in 4 years.

The US Jun ADP employment change rose +150,000, weaker than expectations of +165,000.

US weekly initial unemployment claims rose +4,000 to 238,000, showing a weaker labor market than expectations of 235,000.  Weekly continuing claims rose +26,000 to a 2-1/2 year high of 1.858 million, showing a weaker labor market than expectations of 1.840 million.

The US May trade deficit widened to a 19-month high of -$75.1 billion from -$74.5 billion in April.

US May factory orders unexpectedly fell -0.5% m/m, weaker than expectations of +0.2% m/m and the biggest decline in 4 months.

The US Jun ISM services index fell -5.0 to 48.8, weaker than expectations of 52.7 and the steepest pace of contraction in 4 years.

The Jun 11-12 FOMC meeting minutes showed that officials didn't expect it to be appropriate to lower borrowing costs "until additional information had emerged to give them greater confidence that inflation" is on track to their 2% goal.

The markets are discounting the chances for a -25 bp rate cut at 9% for the July 30-31 FOMC meeting 

and 70% for the following meeting on Sep 17-18.

EUR/USD (^EURUSD) Wednesday rose by +0.31% and posted a 3-week high. Wednesday's weakness in the dollar was support for the euro.  Also, an upward revision to the Eurozone Jun composite PMI was positive for EUR/USD.  The euro fell back from its best levels Wednesday after ECB Governing Council member Stournaras said two more rate cuts by the ECB this year is “reasonable.”  Also, the Eurozone May PPI declined more than expected, a dovish factor for ECB policy. 

The Eurozone Jun S&P composite PMI was revised upward by +0.1 to 50.9 from the previously reported 50.8.

Eurozone May PPI fell -0.2% m/m and -4.2% y/y, weaker than expectations of -0.1% m/m and -4.1% y/y.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 6% for the July 18 meeting and 70% for the September 12 meeting.

USD/JPY (^USDJPY) Wednesday rose by +0.12%.  The yen on Wednesday fell to a new 37-year low against the dollar. Signs of weakness in Japan’s economy may prompt the BOJ to delay further tightening monetary policy and is negative for the yen after the Japan Jun Jibun Bank services PMI was revised downward to a 2-1/4 year low.

The yen recovered from its worst levels Wednesday after weaker-than-expected US economic news knocked T-note yields lower and sparked short covering in the yen.  Also, market participants are concerned that Japanese authorities could intervene in the forex market at any time to support the yen, especially when the US markets are closed on Thursday for the Independence Day holiday, as the thin holiday conditions can produce exaggerated moves in markets. 

The Japan Jun Jibun Bank services PMI was revised downward by -0.4 to 49.4 from the previously reported 49.8, the steepest pace of contraction in 2-1/4 years.

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 53% for the July 31 meeting and 28% for the September 20 meeting.

August gold (GCQ4) Wednesday closed up +36.00 (+1.54%), and September silver (SIU24) closed up +1.195 (+4.07%).  Precious metals rallied Wednesday, with gold and silver posting 1-1/2 week highs.  Wednesday’s slump in the dollar index to a 3-week low supported gains in metals prices. Also, Wednesday’s weaker-than-expected US economic news on the Jun ADP employment change, May factory orders, and the Jun ISM services index are dovish for Fed policy and bullish for precious metals.  In addition, ongoing Middle East tensions are boosting the safe-haven demand for precious metals.  Finally, political uncertainty in France supports safe-haven demand for precious metals ahead of the second round of France’s parliamentary elections this Sunday.

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• Dollar Falls and Precious Metals Rally on Weak US Economic News
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