The dollar index (DXY00) on Thursday rose by +0.33%.  The dollar rose moderately Thursday after U.S. Q4 GDP grew more than expected, which may prompt the Fed to delay cutting interest rates. Gains in the dollar were limited as bond yields fell after weekly jobless claims rose more than expected, a dovish factor for Fed policy.  Also, the strength in stocks Thursday reduced liquidity demand for the dollar.

Thursday’s U.S. economic news was mainly better-than-expected and bullish for the dollar.  Q4 GDP grew at a +3.3% (y/y annualized) pace, stronger than expectations of +2.0%.  Also, Dec capital goods new orders ex-aircraft and parts, a proxy for capital spending, rose +0.3% m/m, stronger than expectations of +0.1% m/m.  In addition, Dec new home sales rose +8.0% m/m to 664,000, stronger than expectations of 649,000.  On the negative side, weekly initial unemployment claims rose +25,000 to 214,000, showing a weaker labor market than expectations of 200,000. 

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 52% chance for that -25 bp rate cut for the following meeting on March 19-20.

EUR/USD (^EURUSD) on Thursday fell by -0.52% and matched Tuesday’s 6-week low.  The euro retreated Thursday after the German Jan IFO business climate unexpectedly fell to a 3-1/2 year low.  Losses in EUR/USD accelerated after ECB President Lagarde said the Eurozone economy “likely” stagnated in Q4, which bolstered speculation of ECB interest rate cuts.

The German Jan IFO business climate unexpectedly fell -1.1 to a 3-1/2 year low of 85.2, weaker than expectations of an increase to 86.6.

The ECB, as expected, kept its main refinancing rate unchanged at 4.50% and said the rate level must be maintained for a sufficiently long time to ensure inflation returns to 2% in a timely way.

ECB President Lagarde said, "The Eurozone economy is likely to have stagnated in the final quarter of 2023."  She added, "The consensus around the table of the Governing Council was that it was premature to discuss rate cuts," and she stands by her recent comments that borrowing costs could be lowered in the summer. 

Swaps are pricing in the chances for a -25 bp rate cut by the ECB at 17% for its next meeting on March 7 and 93% for the following meeting on April 11.

USD/JPY (^USDJPY) on Thursday rose by +0.18%.  On Thursday, the yen gave up overnight gains and turned lower after the stronger-than-expected U.S. Q4 GDP report boosted the dollar.  The yen on Thursday initially found support from higher Japanese government bond yields after the 10-year JGB bond yield rose to a 6-week high at 0.751%.  Also, an upward revision to Japan Dec machine tool orders was positive for the yen. Lower T-note yields on Thursday limited weakness in the yen.

Japan Dec machine tool orders were revised upward by +0.3 to -9.6% y/y from the previously reported -9.9% y/y.

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 18% for its next meeting on March 19 and at 74% for the following meeting on April 26.

February gold (GCG4) Thursday closed +1.80 (+0.09%), and Mar silver (SIH24) closed +0.038 (+0.17%).  Precious metals on Thursday posted modest gains.  Lower global bond yields on Thursday were bullish for precious metals. Silver also garnered support Thursday after the U.S. Q4 GDP grew more than expected and Dec new home sales rose more than expected, which are positive factors for industrial metals demand. Gains in precious metals Thursday were limited due to the dollar's strength.  Gold was also undercut by the ongoing long liquidation of gold by funds after long gold holdings in ETFs fell to a 4-year low Wednesday. 



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