The dollar index (DXY00) on Friday fell by -0.02%. The dollar gave up an early advance on Friday and turned lower following the weaker-than-expected August MNI Chicago PMI report and after the University of Michigan’s US August consumer sentiment index was revised lower. The dollar was also pressured by dovish comments from Fed Governor Christopher Waller, who stated that he supports a 25-bp rate cut at the September FOMC meeting and anticipates additional rate cuts over the next three to six months.
The dollar on Friday initially moved higher on signs of strength in US consumer spending after July personal spending rose by the most in four months. Also, sticky inflation pressures are hawkish for Fed policy and are supportive for the dollar after the US July core PCE price index, the Fed’s preferred inflation gauge, rose to a 5-month high.
Concern over the Fed’s independence and fears about capital flight are negative for the dollar with President Trump’s move to fire Fed Governor Lisa Cook. If Mr. Trump succeeds in firing Fed Governor Cook, foreign investors may lose faith in the Fed and the dollar and swap their dollar assets into non-dollar investments.
US July personal spending rose +0.5% m/m, the most in four months, and right on expectations. Also, July personal income rose +0.4% m/m, right on expectations.
The US July core PCE price index, the Fed’s preferred inflation gauge, rose to a 5-month high of +2.9% y/y from +2.8% y/y in June, right on expectations.
The US Aug MNI Chicago PMI fell -5.6 to 41.5, weaker than expectations of 46.0.
The University of Michigan US Aug consumer sentiment index was revised lower by -0.4 to 58.2, weaker than expectations of no change at 58.6.
Late Thursday, Fed Governor Christopher Waller said he supports a 25 bp rate cut at the September FOMC meeting and anticipates additional rate cuts over the next three to six months. He said, “With underlying inflation close to 2%, market-based measures of longer-term inflation expectations firmly anchored, and the chances of an undesirable weakening in the labor market increased, proper risk management means the FOMC should be cutting the policy rate now.”
Federal funds futures prices are discounting the chances for a -25 bp rate cut at 88% at the September 16-17 FOMC meeting and at 55% for a second -25 bp rate cut at the following meeting on October 28-29.
EUR/USD (^EURUSD) on Friday rose by +0.11%. The euro recovered from early losses on Friday and turned higher after the ECB’s July CPI expectations came in higher than expected, a hawkish factor for ECB policy. Also, the stronger-than-expected German Aug CPI report is hawkish for ECB policy and supportive for the euro.
The euro initially moved lower on Friday due to a stronger dollar. Also, concerns over a slowdown in consumer spending in the Eurozone are negative for the euro after German July retail sales fell by the most in nearly two years.
The ECB Jul 1-year CPI expectations were unchanged from Jun at +2.6%, stronger than expectations of +2.5%. The ECB Jul 3-year CPI expectations unexpectedly climbed to +2.5%, stronger than expectations of no change at +2.4%.
German Aug unemployment unexpectedly fell by -9,000, showing a stronger labor market than expectations of +10,000.
German Jul retail sales fell -1.5% m/m, weaker than expectations of no change and the biggest decline in almost two years.
German Aug CPI (EU harmonized) rose +2.1% y/y, stronger than expectations of +2.0% y/y.
On the geopolitical front, diplomatic efforts to end the war in Ukraine remain elusive, as the US tries to broker a peace deal between the two countries. On Friday, German Chancellor Merz and French President Macron called for secondary sanctions on Russia for its war in Ukraine and said they will push for measures targeting “companies from third countries that support Russia’s war.” On Thursday, German Chancellor Merz stated that a meeting between Russian President Putin and Ukrainian President Zelensky is unlikely to take place. The outcome of the Russian-Ukrainian war could have macroeconomic implications regarding tariffs and oil prices, and could, of course, have significant consequences for European security.
Swaps are pricing in a 3% chance of a -25 bp rate cut by the ECB at the September 11 policy meeting.
USD/JPY (^USDJPY) on Friday rose by +0.07%. The yen posted modest losses on Friday due to the weaker-than-expected Japanese economic reports on July industrial production and July retail sales, which are bearish for the yen. In addition, price pressures softened in Japan after the Aug Tokyo CPI eased as expected, a dovish factor for BOJ policy. Also, Higher T-note yields on Friday were bearish for the yen.
Losses in the yen were limited Friday after the Japanese Jul consumer confidence index rose more than expected to a 7-month high. Also, strength in Japan’s labor market is bullish for the yen after the Jul jobless rate unexpectedly fell to a 5.5-year low of 2.3%.
The Japan Jul consumer confidence index rose +1.2 to a 7-month high of 34.9, stronger than expectations of 34.2.
Japan’s July industrial production fell -1.6% m/m, weaker than expectations of -1.1% m/m and the largest decline in 8 months.
Japan July retail sales fell -1.6% m/m, weaker than expectations of -0.2% m/m and the biggest decline in 4.25 years.
The Japan July jobless rate unexpectedly fell -0.2 to a 5.5-year low of 2.3%, showing a stronger labor market than expectations of no change at 2.5%.
Japan Aug Tokyo CPI eased to +2.6% y/y from +2.9% y/y in July, right on expectations. Aug Tokyo CPI ex-fresh food and energy eased to +3.0% y/y from +3.1% in July, right on expectations.
December gold (GCZ25) on Friday closed up +41.80 (+1.20%), and September silver (SIU25) closed up +1.010 (+2.58%). Precious metal prices rallied sharply on Friday, with gold climbing to a 3-week high and silver posting a 14-year nearest-futures high. Signs of sticky global inflation pressures are boosting demand for gold as an inflation hedge, following Friday’s news that the US July core PCE price index, the Fed’s preferred inflation gauge, rose to a five-month high, and after the German August CPI rose more than expected.
Also, President Trump’s move to fire Fed Governor Lisa Cook has sparked concerns about the Fed’s independence and increased demand for safe-haven assets, including precious metals. In addition, political uncertainty in France is driving demand for gold as a safe-haven, following French Prime Minister Bayrou’s call for a confidence vote that could bring down his government as soon as next month. Finally, dovish comments from Fed Governor Christopher Waller were bullish for precious metals when he stated that he supports a 25-bp rate cut at the September FOMC meeting and anticipates additional rate cuts over the next three to six months.
Gold has continued safe-haven support related to US tariffs and geopolitical risks, including the conflicts in Ukraine and the Middle East. The fund buying of precious metals continues to support prices, following the rise in gold holdings in ETFs to a 2-year high on Thursday and the rise in silver holdings in ETFs to a 3-year high the same day.
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
