The dollar index (DXY00) on Wednesday rose by +0.08% and posted a 1-month high.  A jump in T-note yields Wednesday strengthened the dollar's interest rate differentials and boosted the dollar.  Also, Wednesday's slump in global equity markets increased liquidity demand for the dollar.  In addition, Wednesday’s better-than-expected U.S. economic news supported the dollar. 

Wednesday’s U.S. economic news was hawkish for Fed policy and bullish for the dollar.   Dec retail sales rose +0.6% m/m, stronger than expectations of +0.4% m/m.  Also, Dec manufacturing production rose +0.1% m/m, stronger than expectations of no change.  In addition, the Jan NAHB housing market index rose +7 to 44, stronger than expectations of 39.

The Fed’s Beige book was supportive of the dollar as it stated that a majority of Fed districts reported "little or no change" in economic activity and "overall, most districts indicated that expectations of their firms for future growth were positive, had improved, or both." Also, inflationary pressures eased as businesses in most districts cited examples of steady or falling input prices.

The markets are discounting the chances for a -25 bp rate cut at 3% for the next FOMC meeting on Jan 30-31 and a 56% chance for that -25 bp rate cut for the following meeting on March 19-20.

EUR/USD (^EURUSD) on Wednesday fell by -0.01% and posted a 1-month low.  Dollar strength Wednesday weighed on the euro.  However, EUR/USD recovered most of its losses on Wednesday’s comments from ECB President Lagarde and ECB Governing Council member Knot, who both pushed back on market expectations of ECB interest rate cuts as swap markets now expect only a 21% chance of an ECB rate cut at the March ECB meeting, down from a 50% chance a week ago.

ECB President Lagarde said policymakers need more evidence before they can be sure that consumer prices are under control and that the ECB's first rate cut will probably be in the summer. 

ECB Governing Council member Knot said, "Markets are getting ahead of themselves," and the ECB will need to see a turnaround in wages before it can start to lower interest rates.

Swaps are pricing in the chances for a -25 bp rate cut by the ECB at 3% for its next meeting on January 25 and 21% for the following meeting on March 7.

USD/JPY (^USDJPY) on Wednesday rose by +0.72%.  The yen on Wednesday extended this week’s losses to a 1-1/2 month low against the dollar.  Higher T-note yields Wednesday were bearish for the yen.   Also, expectations that the BOJ will maintain its negative interest rate policy at next week’s meeting are bearish for the yen.  In addition, Wednesday’s stronger-than-expected U.S. economic news pushes back the chances for Fed rate cuts, strengthening the dollar.

February gold (GCG4) Wednesday closed -23.70 (-1.17%), and Mar silver (SIH24) closed -0.424 (-1.84%).  Precious metals on Wednesday posted moderate losses, with gold falling to a 1-month low.  Wednesday’s rally in the dollar index to a 1-month high is bearish for metals prices. Also, Wednesday’s stronger-than-expected U.S. economic news boosted T-notes yields and pushed back the chances for Fed rate cuts, undercutting gold prices.  In addition, the ongoing long liquidation of gold by funds is bearish for gold after long gold holdings in ETFs fell to a 4-year low Tuesday. Finally, hawkish comments Wednesday from ECB President Lagarde and ECB Governing Council member Knot weighed on gold prices after they pushed back on market expectations of ECB interest rate cuts. Silver prices were undercut by Wednesday’s weakness in the Chinese Q4 GDP and Dec new home price reports, signaling weak industrial metals demand.



More Precious Metal News from
  • Stocks Drop as Strong U.S. Economic News Curbs Fed Cut Expectations
  • Dollar Jumps on Higher T-note Yields and Hawkish Waller Comments
  • Stocks Pressured by Higher Bond Yields and Mixed Earnings Results
  • Dollar Recovers on Safe Haven Demand from Geopolitical Risks in the Middle East

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