The dollar index (DXY00) on Wednesday rose by +0.03%. The dollar found support on Wednesday on an increase in safe-haven demand from an escalation of geopolitical risks in Europe after Poland shot down Russian drones that had entered its airspace. However, the dollar gave up most of its advance after bond yields declined on a weaker-than-expected US Aug PPI report, which cemented expectations for at least a 25 bp rate cut by the Fed at next week’s FOMC meeting. The forex markets now await the key US CPI report on Thursday.
Limiting the upside in the dollar are the increased expectations for Fed easing through year-end. The dollar is also being undercut by concerns over Fed independence, which could prompt foreign investors to dump dollar assets as President Trump attempts to fire Fed Governor Cook, and by Stephen Miran’s intention to be a Fed Governor while still technically holding his White House job on the Council of Economic Advisors.
The US final-demand Aug PPI eased to +2.6% y/y from +3.1% y/y in July, a smaller increase than expectations of +3.3% y/y. Aug PPI ex-food and energy eased to +2.8% y/y from +3.4% y/y in July, a smaller increase than expectations of +3.5% y/y.
The markets are now pricing in a 100% chance of a -25 bp rate cut and a 12% chance of a 50 bp rate cut at the upcoming FOMC meeting on Sep 16-17. After the fully expected -25 bp rate cut at the Sep 16-17 meeting, the markets are discounting a 79% chance of a second -25 bp rate cut at the Oct 28-29 meeting. The markets are now pricing in an overall -74 bp rate cut in the federal funds rate by year-end to 3.64% from the current 4.38% rate.
EUR/USD (^EURUSD) on Tuesday fell by -0.09% due to the escalation of geopolitical risks in Europe. The euro is under pressure after Poland on Wednesday shot down drones that crossed into its territory during Russia’s latest air strike on Ukraine, calling it an “act of aggression.” Long liquidation and position squaring are also weighing on the euro ahead of the results of Thursday’s ECB meeting and commentary from ECB President Lagarde. Losses in the euro were limited after the dollar slipped on the weaker-than-expected US Aug PPI report.
The euro also has support due to central bank divergence as the markets view the ECB as largely finished with its rate-cut cycle, while the Fed is expected to cut rates three times by the end of this year.
Swaps are pricing in no chance of a -25 bp rate cut by the ECB at Thursday’s policy meeting.
USD/JPY (^USDJPY) on Tuesday fell by -0.02%. The yen moved slightly higher against the dollar on Wednesday on positive carryover from Tuesday, when Bloomberg News reported that BOJ officials are of the view that it may be possible to raise rates again this year, regardless of domestic political instability, as economic conditions have developed in line with expectations. Also, lower T-note yields on Wednesday were supportive of the yen.
Political uncertainty in Japan is limiting the upside in the yen after Japanese Prime Minister Ishiba resigned following two election results that stripped Japan’s ruling Liberal Democratic Party of its majorities in both houses of parliament, which is seen as paving the way toward a more expansionary fiscal policy.
December gold (GCZ25) on Wednesday closed down -0.20 (-0.01%), and December silver (SIZ25) closed up +0.259 (+0.63%). Precious metal prices on Wednesday settled mixed. Wednesday’s dovish US Aug PPI report cemented expectations of at least a 25 bp rate cut by the Fed at next week’s FOMC meeting, a bullish factor for precious metals. Escalation of geopolitical risks in Europe boosted safe-haven demand for precious metals after Poland on Wednesday shot down drones that crossed into its territory during Russia’s latest air strike on Ukraine, calling it an “act of aggression.”
Gold buying from China’s central bank is also supportive for gold prices after the PBOC boosted its gold purchases by +0.06 million troy ounces in August to 74.02 million troy ounces, marking the tenth consecutive month the central bank has increased its gold reserves. Wednesday’s rally in the S&P 500 to a new record high limited gains in precious metals.
Gold prices continue to receive support from uncertainty tied to US tariffs and geopolitical risks. Also, political uncertainty in France and Japan is driving demand for gold as a safe-haven asset. French Prime Minister Bayrou resigned after losing a confidence vote in parliament on Monday, and Japanese Prime Minister Ishiba resigned following two election results that stripped Japan’s ruling Liberal Democratic Party of its majorities in both houses of parliament, which is seen as paving the way toward a more expansionary fiscal policy.
Precious metals prices continue to receive support from fund buying of precious metal ETFs. Gold holdings in ETFs rose to a 2.25-year high on Tuesday, and silver holdings in ETFs rose to a 3-year high last Wednesday.
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.
