The dollar index (DXY00) today gave up overnight gains and is down by -0.24%. The dollar retreated today after US weekly jobless claims unexpectedly rose to a 3.75-year high and Aug CPI was right on expectations, cementing expectations for at least a 25 bp rate cut by the Fed at next week's FOMC meeting. Also, strength in the euro undercut the dollar after ECB President Lagarde said the disinflationary process is over in the Eurozone, signaling the ECB is done cutting interest rates. Strength in stocks today also reduced liquidity demand for the dollar.
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.
US weekly initial unemployment claims unexpectedly rose by +27,000 to a 3.75-year high of 263,000, showing a weaker labor market than expectations of a decline to 235,000.
US Aug CPI increased to +2.9% y/y from +2.7% y/y in July, right on expectations. Aug CPI ex-food and energy rose +3.1% y/y, unchanged from July and right on expectations.
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 100% chance of a second -25 bp rate cut at the Oct 28-29 meeting. The markets are now pricing in an overall -73 bp rate cut in the federal funds rate by year-end to 3.60% from the current 4.33% rate.
EUR/USD (^EURUSD) today is up by +0.39%. The euro is climbing today after the ECB kept interest rates unchanged, as expected, and raised its 2025 Eurozone GDP forecast. The euro added to its gains on hawkish comments from ECB President Lagarde, who said the ECB now sees growth risks in the Eurozone as more balanced and the disinflationary process is over, signaling the ECB is done cutting interest rates.
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.
Escalation of geopolitical risks in Europe is bearish for the euro 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."
As expected, the ECB kept its deposit facility rate unchanged at 2.00% and said, "Inflation is currently around the 2% medium-term target and the Governing Council's assessment of the inflation outlook is broadly unchanged."
The ECB raised its 2025 Eurozone GDP estimate to +1.2% from a June forecast of +0.9%, and maintained its 2025 Eurozone inflation ex-food and energy estimate at 2.4%.
Swaps are pricing in a 3% chance of a -25 bp rate cut by the ECB at the October 30 policy meeting.
USD/JPY (^USDJPY) today is down by -0.26%. The yen is moving higher after today's Japanese economic news showed Q3 BSI large manufacturing business conditions increased, and Aug producer prices rose as expected, hawkish factors for BOJ policy. The yen still has carryover support 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 today are supportive of the yen.
Gains in the yen may be limited in the near term due to political uncertainty in Japan 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.
Japan Aug PPI increased to +2.7% y/y from +2.5% y/y in July, right on expectations.
Japan Q3 BSI large manufacturing business conditions climbed to 3.8 from -4.8 in Q1.
December gold (GCZ25) today is down -11.00 (-0.30%), and December silver (SIZ25) is up +0.260 (+0.62%). Precious metal prices today are mixed. Gold prices are under pressure today after the ECB kept interest rates unchanged and President Lagarde said that the disinflationary process in the Eurozone is over, signaling the ECB is done cutting interest rates. Also, strength in stocks today has curbed some safe-haven demand for gold.
Losses in gold prices are limited as the dollar and T-note yields fell after US weekly jobless claims unexpectedly rose to a 3.75-year high, cementing at least a 25 bp rate cut by the Fed at next week's FOMC meeting. Escalation of geopolitical risks in Europe has also 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. Silver prices garnered support today after the ECB raised its 2025 Eurozone GDP forecast, a bullish factor for industrial metals demand.
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 Wednesday, and silver holdings in ETFs rose to a 3-year high last Wednesday.
