Key Takeaways
- The US dollar index (DXY) saw a modest increase on Monday, influenced by easing US-China trade tensions and a contained banking sector.
- Stock market rallies and the ongoing US government shutdown acted as headwinds for the dollar.
- EUR/USD experienced slight pressure due to softer German producer prices and a credit rating downgrade for France, though central bank divergence offered some support.
- USD/JPY edged higher as a strong performance in the Nikkei index reduced safe-haven demand for the yen, though hawkish BOJ comments provided an offset.
- Gold and silver prices surged, driven by safe-haven demand stemming from the US government shutdown, trade tensions, central bank buying, and political uncertainties.
Market Analysis: Dollar Index (DXY)
The US dollar index (DXY) experienced a slight uptick of +0.15% on Monday. This movement was primarily attributed to a de-escalation in US-China trade tensions, which positively impacted global growth outlooks and subsequently, the dollar. President Trump’s remarks on Sunday, suggesting an amicable resolution with China, contributed to this sentiment.
Further support for the dollar came from indications that alleged loan frauds affecting Zions Bancorp and Western Alliance Bancorp were isolated incidents, showing no signs of broader contagion within the financial sector.
Factors Limiting Dollar Gains
Despite the positive drivers, the dollar’s ascent was capped by several factors. A notable rally in stock markets on Monday naturally reduced the demand for the dollar as a safe-haven asset. Additionally, the prolonged shutdown of the US government continued to exert downward pressure on the dollar.
💡 The longer the government shutdown persists, the greater the potential negative impact on the US economy, which serves as a bearish signal for the dollar.
Economic Outlook and Interest Rate Expectations
Market sentiment currently reflects a strong expectation of a monetary policy adjustment by the Federal Open Market Committee (FOMC). Traders are pricing in a near certainty (99%) of a -25 basis point rate cut at the upcoming FOMC meeting scheduled for October 28-29.
EUR/USD Performance and Eurozone Economic Indicators
The EUR/USD pair registered a minor decline of -0.09% on Monday. The euro faced subdued trading conditions following data indicating easing price pressures within the Eurozone. Monday’s weaker-than-expected German producer price index (PPI) report suggested dovish implications for the European Central Bank’s (ECB) monetary policy.
Adding to the pressure on the euro was a late-Friday action by S&P Global Ratings, which revised France’s sovereign debt credit rating downwards. However, the divergence in central bank policies provided some support for the euro, with expectations that the US Federal Reserve might continue cutting rates while the ECB is perceived to be nearing the end of its rate-cutting cycle.
Eurozone Economic Data
The German Producer Price Index (PPI) for September showed a month-on-month decrease of -0.1% and a year-on-year decline of -1.7%. These figures fell short of market expectations, which had anticipated a slight monthly increase of +0.1% and a less pronounced annual decrease of -1.5%.
French Credit Rating Downgrade
Late last Friday, S&P Global Ratings downgraded France’s sovereign debt credit rating from AA- to A+. The agency cited elevated budget uncertainties as the primary reason for the downgrade, even with the submission of a draft budget for 2025.
📊 The market is pricing in a minimal 2% chance of a -25 basis point rate cut by the ECB at its policy meeting on October 30.
USD/JPY and Japanese Market Dynamics
The USD/JPY pair saw a modest increase of +0.06% on Monday. The Japanese yen experienced slight depreciation, partly due to a significant surge of over 3% in the Nikkei Stock Index, which reached a new record high. This rally in equities diminished the yen’s appeal as a safe-haven asset.
Additional pressure on the yen stemmed from political developments in Japan. The ruling Liberal Democratic Party reportedly formed a coalition with the Japan Innovation Party, positioning Sanae Takaichi for the prime minister role. Concerns about increased government debt fueled by Takaichi’s support for expanded fiscal stimulus contributed to the weakening of the yen.
⚡ However, the yen’s losses were somewhat contained by hawkish remarks from Bank of Japan (BOJ) board member Takata, who suggested that the current environment is favorable for raising the BOJ’s policy interest rate.
BOJ Board Member’s Stance
BOJ Board member Takata stated, I believe that now is a prime opportunity for the BOJ to raise the policy interest rate as the price stability target has been almost achieved.
Precious Metals Rally: Gold and Silver
December COMEX gold futures (GCZ25) closed significantly higher on Monday, up +146.10 points or +3.47%. Similarly, December COMEX silver futures (SIZ25) saw a substantial gain of +1.271 points, representing a +2.55% increase.
Both gold and silver prices experienced a sharp rally, bringing them close to the record highs established last Friday. The ongoing US government shutdown was a key driver, boosting demand for these precious metals as safe-haven assets.
📌 Lingering concerns surrounding US-China trade tensions also contributed to the increased demand for safe-haven instruments, including precious metals.
Factors Supporting Precious Metals
Precious metals continue to benefit from a confluence of factors driving safe-haven demand. These include uncertainty related to US tariffs, geopolitical risks, active buying by central banks, and political instability observed in France and Japan. Furthermore, President Trump’s public commentary on the independence of the Federal Reserve has reportedly bolstered demand for gold.
⚡ Recent US economic data that has fallen short of expectations has strengthened the outlook for the Federal Reserve to maintain or even increase interest rate cuts, which is a positive indicator for precious metals’ performance.
✅ Precious metals are also receiving support from significant fund inflows into precious metal Exchange Traded Funds (ETFs). Gold holdings in ETFs reached a three-year high last Friday, while silver holdings in ETFs hit a 3.25-year high last Tuesday.
Expert Summary
The global market observed mixed movements on Monday, with the US dollar showing resilience amid easing trade tensions but facing headwinds from a government shutdown and stock market rallies. The euro retreated on signs of slowing inflation and a French credit downgrade, while the yen weakened due to equity market strength but was partially supported by hawkish central bank commentary.
Precious metals, particularly gold and silver, surged significantly, driven by safe-haven demand stemming from geopolitical uncertainties, central bank actions, and a more dovish outlook for US interest rates.