Dollar Under Pressure as US CPI Report Paves Way for Fed Rate Cuts

The dollar index (DXY00) today is down by -0.16% at a 1-week low.  The dollar is under pressure as today’s as-expected US Jul CPI report reinforced expectations for the Fed to cut interest rates at next month’s FOMC meeting, a bearish factor for the dollar.  However, losses in the dollar are limited as expectations for a 50 bp rate cut by the Fed at the Sep 17-18 FOMC meeting were reduced to 47% today from 75% last week.

US MBA mortgage applications rose +16.8% in the week ended Aug 9, with the purchase mortgage sub-index up +2.8% and the refinancing sub-index up +34.5%.  The average 30-year fixed rate mortgage fell -1 bp to a 5-month low of 6.54% from 6.55% the previous week. 

US July CPI eased to 2.9% y/y from 3.0% y/y, better than expectations of no change at 3.0% y/y and the smallest year-on-year increase in over three years.  July CPI ex-food and energy eased to 3.2% y/y from 3.3% y/y in Jun, right on expectations and the smallest annual increase in 3-1/4 years.

The markets are discounting the chances at 100% for a -25 bp rate cut at the Sep 17-18 FOMC meeting and at 47% for a -50 bp rate cut at that meeting.

EUR/USD (^EURUSD) today is up by +0.38% at a 7-1/4 month high.  The euro is finding support today from a weaker dollar.  Also, speculation that the Fed will cut interest rates by more than the ECB is boosting the euro as swap markets have priced in 100 bp of Fed rate cuts by December, compared to only 70 bp of cuts by the ECB.  Gains in the euro are limited after Eurozone Jun industrial production unexpectedly declined.

Eurozone employment eased last quarter as Q2 employment rose +0.2% q/q and +0.8% y/y, weakening from +0.3% q/q and +1.0% y/y in Q1.

Eurozone June industrial production unexpectedly fell -0.1% m/m, weaker than expectations of +0.5% m/m.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 96% for the September 12 meeting.

USD/JPY (^USDJPY) today is up by +0.09%.  The yen is under pressure today after Japanese Prime Minister Kishida said he won't run for a second term as leader of Japan's ruling party, which creates political uncertainty in Japan.  Also, today’s rally in the Nikkei Stock Index to a 1-1/2 week high reduced safe-haven demand for the yen.  The yen recovered from its worst levels today after T-note yields declined.

Swaps are pricing in the chances for a +10 bp rate hike by the BOJ at 0% for the September 20 meeting and +11% for the October 30-31 meeting.

December gold (GCZ24) today is down -10.90 (-0.43%), and September silver (SIU24) is up +0.019 (+0.074%).   Gold and silver prices today are mixed, with silver posting a 1-week high. Reduced expectations for a 50 bp rate cut at next month’s FOMC meeting are weighing on gold prices today as swap markets have priced in only a 47% chance for a 50 bp rate cut, down from 75% last week.  A negative factor for silver was today’s report that showed an unexpected decline in Eurozone June industrial production, a bearish factor for industrial metals demand. 

Today’s decline in the dollar index to a 1-week low is bullish for metals prices.  Also, lower T-note yields today are supportive of precious metals.  In addition, safe-haven demand for precious metals remains strong as an attack by Iran on Israel may be imminent in retaliation for the recent assassination of a Hamas political leader in Tehran. 

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