Dollar Recovers Early Losses on Hawkish Fed Governor Comments

The dollar index (DXY00) today is up by +0.15%.  The dollar today recovered from overnight losses and is moderately higher on hawkish comments from Fed Governor Bowman that reduced chances for a -50 bp rate cut at the November FOMC meeting when she said core inflation remains "uncomfortably" above the Fed's 2% target.  Also, today’s better-than-expected US Chicago PMI and Dallas Fed manufacturing reports supported the dollar. 

The US Sep MNI Chicago PMI unexpectedly rose +0.5 to 46.6, stronger than expectations of -0.1 to 46.0.

The US Sep Dallas Fed manufacturing outlook survey index unexpectedly rose +0.7 to a 20-month high of -9.0, stronger than expectations of a decline to -10.8.

Fed Governor Bowman said core inflation remains "uncomfortably" above the Fed's 2% target, supporting the case for a "measured" approach to lowering interest rates.

The markets are discounting the chances at 100% for a -25 bp rate cut at the November 6-7 FOMC meeting and at 39% for a -50 bp rate cut at that meeting.

EUR/USD (^EURUSD) today is down by -0.02%.  The euro today gave up overnight gains and turned slightly lower after today’s news that the German and Italian CPIs eased in September, a dovish factor for ECB policy.  Also, ECB President Lagarde's comments today bolstered speculation that the ECB will cut interest rates next month, a negative factor for the euro when she said policymakers are more confident that inflation is being controlled and will reflect that at its October policy meeting. 

German Sep CPI (EU harmonized) eased to +1.8% y/y from +2.0% y/y in Aug, right on expectations and the smallest increase in 3-1/2 years.

Italy’s Sep CPI (EU harmonized) eased to +0.8% y/y from +1.2% y/y in Aug, right on expectations and the smallest pace in 4 months.

ECB President Lagarde said ECB policymakers are becoming more optimistic that they will be able to get inflation under control, and “we will take that into account in our next monetary policy meeting in October.” 

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 91% for the October 17 meeting and at 100% for that -25 bp rate cut at the December 12 meeting.

USD/JPY (^USDJPY) today is up by +0.59%.  The yen today fell back from a 1-1/2 week high against the dollar and turned lower as strength in T-note yields sparked long liquidation in the yen.  The yen initially moved higher today on positive carryover from last Friday after former defense minister Shigeru Ishiba, who is seen as supportive of the BOJ's plan to hike rates gradually, unexpectedly won the election for leader of the Liberal Democratic Party, defeating Sanae Takaichi, who had opposed interest rate hikes.  According to news sources from NHK, incoming Prime Minister Ishiba plans to dissolve Japan’s lower house of parliament on October 9 and hold a general election on October 27. 

Swaps are pricing in the chances for a +10 bp rate hike by the BOJ at 5% for the October 30-31 meeting and at +23% for that +10 bp rate hike at the December 18-19 meeting.

December gold (GCZ24) today is down -11.20 (-0.42%), and December silver (SIZ24) is down -0.491 (-1.56%).  Precious metals today are trading lower.  Hawkish comments today from Fed Governor Bowman pushed T-note yields and the dollar higher, which weighed on precious metals when she said core inflation remains "uncomfortably" above the Fed's 2% target.  Silver prices are also under pressure today after the US Sep MMI Chicago PMI contracted for the eleventh consecutive month, a bearish factor for industrial metals demand. 

Losses in precious metals were contained today by dovish comments from ECB President Lagarde that bolstered speculation the ECB will cut interest rates next month when she said policymakers are more confident that inflation is being brought under control and will reflect that at its October policy meeting.  Also, today’s German and Italian CPIs fell below the ECB’s 2% target, which may prompt the ECB to cut interest rates further, a positive factor for gold.  In addition, fund buying of gold supported gold prices as long gold positions in ETFs rose to a 7-1/2 month high last Friday. 

• Dollar Weakens on Dovish US Economic Reports
• Dollar Falls on Weaker-Than-Expected US Economic Reports
• Dollar Slides as Chinese Stimulus Boosts the Yuan
• Dollar Recovers Early Losses as T-note Yields Climb

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