Dollar Sees Support From Reduced Chance of 50 bp Fed Rate Cut Next Week

The dollar index (DXY00) Wednesday rose by +0.05%.  The dollar Wednesday recovered from early losses and climbed to a 1-week high after the as-expected US Aug core CPI report diminished the chances of a 50 bp rate cut by the Fed at next week’s FOMC meeting, a supportive factor for the dollar.  Also, a rebound in T-note yields Wednesday supported modest gains in the dollar. 

The dollar Wednesday initially moved lower after the 10-year T-note yield fell to a 15-month low and after hawkish comments from BOJ member Nakagawa pushed the yen up to an 8-month high against the dollar.

US Aug CPI eased to +2.5% y/y from +2.9% y/y in July, right on expectations and the smallest increase in 3-1/2 years.  Aug CPI ex-food and energy was unchanged from July at +3.2% y/y, right on expectations.

The markets are discounting the chances at 100% for a -25 bp rate cut at the Sep 17-18 FOMC meeting and at 14% for a -50 bp rate cut at that meeting.

EUR/USD (^EURUSD) Wednesday fell by -0.02% and posted a 3-1/2 week low. Wednesday’s rally in the dollar index to a 1-week high undercut the euro.  The euro is also under pressure on expectations that the ECB will cut interest rates by 25 bp at Thursday’s policy meeting and express a dovish bias moving forward.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 100% for the September 12 meeting.

USD/JPY (^USDJPY) Wednesday fell by -0.13%.  The yen on Wednesday rallied to an 8-month high against the dollar based on hawkish comments from BOJ Board member Nakagawa, who said the BOJ will continue to raise interest rates provided the economy performs in line with their projections.  The yen fell back from its best levels after T-notes yields climbed on the release of the US Aug CPI report.

BOJ Board member Nakagawa said, "The current level of real rates is extremely low, and I think that the degree of monetary easing will be adjusted if the outlook for Japan's economy and inflation is realized."

Swaps are pricing in the chances for a +10 bp rate hike by the BOJ at 0% for the September 20 meeting and at +16% for the October 30-31 meeting.

December gold (GCZ24) Wednesday closed down -0.70 (-0.03%), and December silver (SIZ24) closed up +0.314 (+1.10%).  Precious metals Wednesday settled mixed.  Wednesday’s rally in the dollar index to a 1-week high was bearish for metals.  Also, higher T-note yields on Wednesday were negative for precious metals.  Gold prices also fell after Wednesday’s as-expected US Aug CPI report dampened expectations for a 50 bp rate cut by the Fed at next week’s FOMC meeting.  In addition, hawkish comments Wednesday from BOJ Board member Nakagawa undercut gold when she said the BOJ will continue to raise interest rates if the economy performs as expected.

Expectations for the ECB to cut interest rates by -25 bp at Thursday’s policy meeting are bullish for precious metals.  Also, Wednesday’s +2% rally in crude oil prices boosted inflation expectations and demand for gold as an inflation hedge.

More Precious Metal News from Barchart

• Dollar Rebounds With T-Note Yields on Sticky US Core CPI
• Dollar Slightly Higher on Reduced Speculation About a -50 bp Rate Cut
• Dollar Slightly Higher on Reduced Speculation About a -50 bp Rate Cut
• Dollar Rises on Speculation About Less Aggressive Fed Rate Cuts

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.