Quick Summary
- The US Dollar Index (DXY) reached a three-week high, driven by rising T-note yields.
- Hawkish remarks from Fed Chair Powell regarding potential rate cuts provided carryover support for the dollar.
- Easing US-China trade tensions are seen as positive for global economic growth prospects.
- The ongoing US government shutdown continues to exert pressure on the dollar by potentially impacting the US economy.
- The Euro initially weakened against the dollar but showed resilience following the ECB’s decision to hold rates steady.
Dollar Strength Fueled by Yields and Fed Commentary
The US Dollar Index (DXY00) experienced a notable climb, reaching a three-week high and posting a gain of +0.19%. This upward movement is closely linked to the performance of Treasury note yields, which have also reached a 2.5-week peak. Higher yields generally make dollar-denominated assets more attractive to investors, thereby strengthening the currency.
Further bolstering the dollar was the lingering sentiment from Fed Chair Jerome Powell’s remarks. His statement that a rate cut at the December FOMC meeting is not a foregone conclusion signaled a more cautious approach from the Federal Reserve, which is typically positive for the dollar.
Geopolitical and Economic Factors Influencing the Markets
Positive developments in international trade relations have also contributed to market sentiment. The agreement between President Trump and President Xi Jinping to extend a tariff truce, along with rollbacks in export controls and other trade barriers, signals reduced tensions and supports expectations for improved global economic growth.
💡 Despite these positive drivers, the dollar remains under pressure due to the ongoing US government shutdown. A prolonged shutdown could negatively impact the US economy, potentially leading the Federal Reserve to consider interest rate cuts, which would typically weaken the dollar.
The market is currently pricing in a substantial probability of a Federal Open Market Committee (FOMC) rate cut. There is a 72% chance anticipated for a 25 basis point cut at the upcoming December 9-10 meeting. Moreover, the aggregate expectation points towards an 82 basis point reduction in interest rates by the end of 2026, bringing the effective federal funds rate down from its current level.
Euro’s Resilience Amidst Divergent Central Bank Policies
The EUR/USD pair experienced a decline, reaching a two-week low and trading down by -0.15%. The dollar’s overall strength played a significant role in this movement. However, the euro managed to recover from its weakest point after the European Central Bank (ECB) opted to keep its interest rates unchanged following its policy meeting.
Supporting the euro were stronger-than-expected economic data releases from the Eurozone. The Q3 GDP report indicated a faster pace of expansion than anticipated, and the German October Consumer Price Index (CPI) report also exceeded expectations. These figures suggest a more hawkish stance for ECB policy, which is generally beneficial for the euro. Additionally, positive commentary from ECB President Christine Lagarde, who noted that downside risks to growth have eased, provided a bullish signal for the euro.
The divergence in monetary policy between the ECB and the Federal Reserve is a key factor supporting the euro. While the ECB is perceived as having concluded its rate-cut cycle, the Fed is still expected to implement further rate cuts in the coming years.
📊 Eurozone Q3 GDP showed a growth of +0.2% quarter-on-quarter and +1.3% year-on-year, surpassing the forecasts of +0.1% q/q and +1.2% y/y.
📍 The Eurozone’s economic sentiment indicator for October rose by +1.2 points to 96.8, reaching a 2.5-year high and exceeding the expected 96.0.
✅ German October CPI (harmonized for EU comparison) increased by +0.3% month-on-month and +2.3% year-on-year, which was stronger than the anticipated +0.2% m/m and +2.2% y/y.
The ECB maintained its deposit facility rate at 2.00%, as widely expected.
ECB President Lagarde highlighted that recent developments, including the EU’s trade deal with the US, a ceasefire in the Middle East, and progress in China-US relations, have mitigated downside risks to growth.
Current market pricing suggests a low, 5% probability of a 25 basis point rate cut by the ECB at its upcoming policy meeting on December 18.
Yen Weakens Amidst BOJ’s Steady Stance and Rising Yields
The USD/JPY pair saw a significant increase, trading up by +0.94%. The Japanese yen depreciated to an 8.5-month low against the dollar following the Bank of Japan’s (BOJ) decision to keep its interest rates unchanged after its policy meeting. The prevailing higher yields in US Treasury notes also contributed to the yen’s weakness.
The decline in the yen accelerated after BOJ Governor Kazuo Ueda stated that the bank was not at risk of falling behind the curve despite its decision to maintain current interest rates. This suggests the BOJ is prioritizing data observation over immediate policy adjustments.
As anticipated, the BOJ left its target policy rate unchanged at 0.50%. Governor Ueda explained that the decision was based on the need to observe more data regarding domestic wage-setting behaviors, especially given the continued uncertainty in overseas economies.
⚡ The BOJ revised its 2025 GDP forecast for Japan upward to +0.7% from +0.6%, while maintaining its 2025 core CPI forecast at 2.7%.
Precious Metals Show Recovery Signs Amidst Complex Market Dynamics
December COMEX gold futures (GCZ25) edged higher, gaining +20.10 (+0.50%), while December COMEX silver futures (SIZ25) also saw an increase of +0.592 (+1.24%). Precious metals have shown a recovery trend after initial losses, driven by several factors.
📈 Strong demand from central banks continues to support gold prices. The World Gold Council reported that global central banks purchased 220 metric tons of gold in the third quarter, a 28% increase from the second quarter. This brings total central bank gold purchases for the year through September to 634 metric tons.
Signs of improving economic strength, particularly the better-than-expected Q3 GDP in the Eurozone, are bolstering demand for industrial metals like silver. The easing of US-China trade tensions may also provide further support for economic growth and industrial metals demand.
Initially, precious metals faced downward pressure from a stronger US dollar and rising global bond yields. The reduction in US-China trade tensions also diminished some of the safe-haven demand historically associated with precious metals.
💡 Furthermore, comments from Fed Chair Powell regarding the December FOMC meeting not being a foregone conclusion for a rate cut, while dovish overall, initially added some pressure given the context of higher yields.
However, underlying support for precious metals remains due to ongoing factors such as the US government shutdown, uncertainties surrounding US tariffs, geopolitical risks, consistent central bank buying, and political considerations impacting the Federal Reserve’s independence.
Recent US economic data that has been weaker than expected could reinforce the outlook for continued Fed rate cuts, which would be a bullish factor for precious metals.
Despite these supportive elements, precious metals have faced liquidation pressures since reaching record highs earlier in the month. The recent rally in the S&P 500 to new record highs has also reduced safe-haven demand, leading to significant long liquidations and outflows from exchange-traded funds (ETFs). Holdings in gold ETFs have fallen from recent peaks, and silver ETF holdings have also experienced declines.
Expert Summary
The US dollar strengthened significantly, driven by rising bond yields and hawkish sentiment from the Federal Reserve. While global trade developments offered support, the domestic US government shutdown remained a concern. The Euro showed resilience against the dollar following the ECB’s steady rate decision, supported by positive regional economic data. The Japanese yen weakened considerably due to the Bank of Japan maintaining its accommodative stance and higher global yields. Precious metals experienced a complex trading session, recovering from initial weakness driven by central bank buying and signs of economic improvement, despite headwinds from a stronger dollar and market liquidations.