Dollar Sinks as Weak US CPI Report Puts Rate Cuts in Play

The dollar index (DXY00) today is down by -0.73% at a 1-month low.  The dollar retreated today after the weaker-than-expected US June CPI report bolstered speculation the Fed will be able to cut interest rates this year.  Also, today’s s rally in the S&P 500 to a new record high reduced liquidity demand for the dollar.  A supportive factor for the dollar was the decline in weekly US jobless claims to a 6-week low, a sign of strength in the labor market that is hawkish for Fed policy.

The US June CPI eased to +3.0% y/y from +3.3% y/y in May, better than expectations of +3.1% y/y.  The June CPI ex-food and energy eased to a 3-year low of +3.3% y/y from +3.4% y/y in May, better than expectations of no change at +3.4% y/y.

US weekly initial unemployment claims fell -17,000 to a 6-week low of 222,000, showing a stronger labor market than expectations of 235,000.  Weekly continuing claims unexpectedly fell -4,000 to 1,852 million, showing a stronger labor market than expectations of an increase to 1.860 million. 

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

and 85% for the following meeting on Sep 17-18.

EUR/USD (^EURUSD) today is up by +0.39% at a 1-month high.  Today’s slump in the dollar is boosting the euro. The euro fell back from its best levels after the 10-year German bund yield fell to a 1-1/2 week low today, which weakened the euro’s interest rate differentials. 

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 5% for the July 18 meeting and 78% for the September 12 meeting.

USD/JPY (^USDJPY) today is down sharply by -1.90%.  The yen jumped to a 3-week high against the dollar today after the weaker-than-expected US CPI report knocked T-note yields lower and sparked short covering in the yen.  Gains in the yen accelerated after TV Asahi reported that the Japanese government and BOJ intervened in the forex market today in support of the yen.

On the negative side for the yen was today’s unexpected decline in Japan’s May core machine orders, a dovish factor for BOJ policy.  Also, today’s rally in the Nikkei Stock Index to a new record high curbed safe-haven demand for the yen.   

Japan's May core machine orders unexpectedly fell -3.2% m/m, weaker than expectations of +0.8% m/m and the biggest decline in 6 months.

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 57% for the July 31 meeting and 37% for the September 20 meeting.

August gold (GCQ4) today is up +36.30 (+1.52%), and September silver (SIU24) is up +0.766 (+2.47%).  Precious metals prices today are rallying, with gold posting a 7-week high and silver posting a 6-week high.  Today’s fall in the dollar to a 1-month low is supportive of metals. Also, today’s weaker-than-expected US CPI report knocked bond yields lower and boosted expectations for the Fed to cut interest rates, a bullish factor for precious metals.

On the bearish side, today’s rally in the S&P 500 to a new record high curbs safe-haven demand for precious metals.  Also, a decline in inflation expectations reduces demand for gold as an inflation hedge after the US 10-year breakeven inflation rate fell to a 2-week low today. A negative factor for silver was the unexpected decline in today’s Japan May core machine orders, a bearish factor for industrial metals demand.

• Dollar Slightly Lower Ahead of US Jun CPI Report
• Dollar Slips with Lower T-note Yields and Rising Stocks
• Dollar Firms as Powell’s Comments Boost T-note Yields
• Dollar Climbs with T-note Yields

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