The dollar index (DXY00) today is trading slightly lower by -0.05%. The dollar is trading on the defensive ahead of the 2-day FOMC meeting that begins today, which could yield a dovish outcome with hints of further rate cuts and a possible end to quantitative tightening.
The dollar remains under pressure from the ongoing US government shutdown. The longer the shutdown is maintained, the more likely the US economy will suffer and the more likely the Fed will have to cut interest rates.
The dollar has underlying support from today's +0.6 bp rise in the 10-year T-note yield, which supported the dollar's interest rate differentials. The dollar also has support from today's stronger-than-expected Richmond Fed and US consumer confidence reports.
The markets are discounting a 98% chance of a -25 bp rate cut at this week's FOMC meeting. Assuming the Fed proceeds with this week's -25 bp rate cut, the markets are then discounting a 94% chance of another -25 bp rate cut at the next FOMC meeting on December 10. The markets are discounting an overall 115 bp rate cut by the end of 2026 to 2.95% from the current effective federal funds rate of 4.10%.
The FOMC at this week's meeting is not scheduled to release a Summary of Economic Projections, which contains the Fed's dot plot. That means the markets on Wednesday will hear from Fed Chair Powell at his regular post-meeting press conference, but will not receive an update from other Fed officials on their views of the future course of interest rates.
However, markets are hoping for an update on when the Fed might end its quantitative tightening, which involves allowing its balance sheet to decline. A halt to the Fed's quantitative tightening would be bullish for the stock and bond markets, as the Fed would no longer be draining liquidity from the US financial system.
The Aug FHFA US house price index rose +0.4% m/m, which was stronger than expectations of -0.1%. Meanwhile, the S&P Cotality CS US 20-city house index rose by +0.19% m/m and +1.58% y/y, which was stronger than expectations of -0.10% m/m and +1.30% y/y.
The Oct Richmond Fed manufacturing index rose 13 points to -4, which was stronger than market expectations of a 5-point rise to -12.
The Oct Conference Board US consumer confidence index fell -1.0 point to 94.6 from a revised 95.6, which was stronger than expectations of 93.4.
The dollar was undercut on Monday by reduced safe-haven demand after US and Chinese negotiators, who met over the weekend in Malaysia, said they reached a tentative trade agreement. The agreement is expected to be finalized at Thursday's summit between Presidents Trump and Xi on the sidelines of the APEC conference in South Korea. Treasury Secretary Bessent said the agreement means the US threat of a 100% tariff on US imports from China, set to start November 1, is "effectively off the table." Meanwhile, China agreed not to restrict the export of rare earth metals for at least one year and to buy a "substantial" amount of US soybeans. The two sides also made progress on shipping fees and US demands that China crack down on the export to the US of fentanyl and precursors. The two sides may also reach an agreement that would allow US consumers to continue to access TikTok.
EUR/USD (^EURUSD) rose by +0.09%, seeing support from dollar weakness.
The euro continues to see support from central bank divergence, with the ECB viewed as being finished with its rate-cut cycle while the Fed is expected to cut rates by at least another percentage point by the end of 2026.
Swaps are pricing in a 1% chance of a -25 bp rate cut by the ECB at the October 30 policy meeting.
USD/JPY (^USDJPY) is down -0.52%. The yen is seeing support from increased confidence about Japan's political and trade position after President Trump praised new Japanese Prime Minister Sanae Takaichi after a meeting in Tokyo, indicating US support for Japan's new leader and reducing concern about US tariff pressure on Japan. The yen also saw support after Japan's minister for growth strategy, Minoru Kiuchi, said Japanese authorities will monitor the impact of yen weakness on the economy, suggesting that action might be forthcoming to support the yen.
December COMEX gold (GCZ25) is down -56.5 (-1.41%), and December COMEX silver (SIZ25) is up +0.221 (+0.47%).
Dec gold prices today fell to a 3-week low, as long liquidation pressures persist following the sharp rally seen over the past two months. Precious metals prices this week have been undercut by reduced safe-haven demand due to the US-China preliminary trade agreement announced over the weekend.
Precious metals have underlying safe-haven support due to the ongoing US government shutdown, uncertainty over US tariffs, geopolitical risks, central bank buying, and political pressure on the Fed's independence. In addition, recent weaker-than-expected US economic news has bolstered the outlook for the Fed to keep cutting interest rates, a bullish factor for precious metals.
Precious metals prices are under pressure from ETF outflows amid heavy long liquidation. Gold holdings in ETFs fell by a total of -0.8% as of last Friday from last Tuesday's 3-year high. Silver holdings in ETFs fell by a total of -1.3% as of last Friday from last Tuesday's 3.25-year high.
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.
