Dollar Falls as US Payroll Report Bolsters the Odds for Fed Rate Cuts

The dollar index (DXY00) today is down by -0.03% at a 3-week low.  The dollar retreated today after the US Jun payroll report bolstered expectations for the Fed to cut interest rates this year. Also, strength in the British pound (^GBPUSD) is weighing on the dollar after a landslide victory by the UK Labour Party in Wednesday’s general election boosted the pound to a 3-week high.  Losses in the dollar were contained due to hawkish comments from New York Fed President Williams who said we still” have a way to go” to reach our 2% inflation target on a sustained basis.

US Jun nonfarm payrolls rose +206,000, stronger than expectations of +190,000.  However, May nonfarm payrolls were revised down to +218,000 from the previously reported +272,000.  Also, the Jun unemployment rate unexpectedly rose +0.1 to a 2-1/2 year high of 4.1%, showing a weaker labor market than expectations of no change at 4.0%.

US Jun average hourly earnings eased to +3.0% y/y from +4.1% y/y in May, right on expectations and the slowest pace of increase in 3 years.

New York Fed President Williams said, "Inflation is now around 2.5%, so we have seen significant progress in bringing it down.  But we still have a way to go to reach our 2% target on a sustained basis."

The markets are discounting the chances for a -25 bp rate cut at 5% for the July 30-31 FOMC meeting 

and 75% for the following meeting on Sep 17-18.

EUR/USD (^EURUSD) today is up by +0.05% at a 3-week high.  Today’s slump in the dollar is supporting moderate gains in the euro.  Gains in the euro are limited due to today’s weaker-than-expected news on Eurozone May retail sales and German May industrial production.  Also, concerns about the second round of France’s parliamentary elections on Sunday are weighing on the euro. 

Eurozone May retail sales rose +0.1% m/m, weaker than expectations of +0.2% m/m.

German May industrial production unexpectedly fell -2.5% m/m, weaker than expectations of a +0.1% m/m increase and the biggest decline in 17 months.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 5% for the July 18 meeting and 70% for the September 12 meeting.

USD/JPY (^USDJPY) today is down by -0.09%.  The yen today climbed to a 1-week high against the dollar.  The yen garnered support from today’s Japanese economic news that showed the May leading index CI rose more than expected. Gains in the yen accelerated after T-note yields tumbled on today’s US Jun payroll report.  Strength in the yen was limited after Japan’s May household spending unexpectedly declined, a dovish factor for BOJ policy.

The Japan May leading index CI rose +0.2 to 111.1, stronger than expectations of 111.0.

Japan's May household spending unexpectedly fell -1.8% y/y, weaker than expectations of +0.3% y/y and the biggest decline in 4 months.

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 50% for the July 31 meeting and 32% for the September 20 meeting.

August gold (GCQ4) today is up +17.00 (+0.72%), and September silver (SIU24) is up +0.308 (+1.00%).  Precious metals prices are climbing today, with gold posting a 4-week high and silver posting a 2-week high.  Today’s slump in the dollar index to a 3-week low is bullish for metals prices. Also, today’s tumble in global bond yields is supportive of precious metals.  In addition, today’s US Jun payroll report showed that the unemployment rate unexpectedly rose to a 2-1/2 year high, and June average hourly earnings fell to a 3-year low, which is dovish for Fed policy and positive for precious metals.  Silver found carryover support from today ‘s rally in copper prices to a 5-week high.

On the negative side for precious metals are today’s hawkish comments from New York Fed President Williams, who said the Fed still has a way to go to reach its 2% inflation target on a sustained basis.  A bearish factor for silver prices was today’s report on German May industrial production, which fell by the most in 17 months, a bearish factor for industrial metals demand.

• Stocks Rally as US June Payroll Report Boosts Rate Cut Chances
• Dollar Slides as Weak US Economic News Bolsters Rate Cut Hopes
• Stocks Supported as Weak US Economic News Bolsters Hopes for Fed Rate Cuts
• Dollar Falls and Precious Metals Rally on Weak US Economic News

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