Key Takeaways
- The U.S. Dollar Index (DXY) reached a 2.75-month high, influenced by hawkish comments from Federal Reserve officials and a stronger-than-expected Chicago PMI.
- The ongoing U.S. government shutdown poses a risk to the economy, potentially influencing the Fed’s interest rate decisions.
- EUR/USD declined to a 2.75-month low due to dollar strength, despite positive Eurozone CPI and German retail sales data.
- USD/JPY saw a slight decrease as the yen gained support from better-than-expected Japanese industrial production and Tokyo CPI data, though retail sales tempered gains.
- Gold prices rose, supported by central bank purchases and safe-haven demand, while silver prices dipped amid concerns over Chinese industrial metals demand and equity market strength.
U.S. Dollar Strength Driven by Hawkish Fed Commentary and Economic Data
The U.S. Dollar Index (DXY) experienced a notable increase of +0.22%, marking a fresh 2.75-month high. This upward movement was primarily fueled by hawkish commentary from Kansas City Fed President Jeff Schmid and Dallas Fed President Lorie Logan, both of whom articulated reasons for opposing immediate Federal Reserve rate cuts. The dollar also found support from the release of the October MNI Chicago PMI, which exceeded expectations. This recent strength builds on carryover momentum from Wednesday, following remarks by Fed Chair Powell indicating that a December rate cut is not a foregone conclusion. However, the dollar’s gains were somewhat tempered by a rally in the stock market, which reduced the demand for the dollar as a safe-haven asset.
📍 The ongoing U.S. government shutdown presents a significant headwind for the dollar. The longer the shutdown persists, the greater the potential negative impact on the U.S. economy, which could, in turn, increase the likelihood of the Federal Reserve needing to lower interest rates.
📊 The MNI Chicago PMI for October showed a significant improvement, rising by +3.2 to 43.8, surpassing the forecasted figure of 42.3. This indicates a stronger-than-anticipated manufacturing sector performance in the Chicago region.
⚡ Kansas City Fed President Jeff Schmid explained his dissent on the recent 25 basis point interest rate cut, citing a balanced labor market, continued economic momentum, and persistent inflation as reasons for his opposition. He stated, the labor market is largely in balance, the economy shows continued momentum, and inflation remains too high.
⚡ Dallas Fed President Lorie Logan echoed similar sentiments, expressing her view that a rate cut was not necessary this week and that further reductions in December would require clear evidence of inflation falling faster than anticipated or a more rapid cooling of the labor market.
📊 Market participants are pricing in a 62% probability of a 25 basis point cut to the Federal Funds target range at the upcoming FOMC meeting on December 9-10. Projections indicate an overall rate cut of 82 basis points by the end of 2026, bringing the effective federal funds rate down from the current 3.88% to approximately 3.06%.
Euro and Yen Movements Amidst Global Economic Shifts
The EUR/USD pair experienced a significant decline of -0.37%, reaching a 2.75-month low, largely attributed to the prevailing strength of the U.S. dollar. Despite this, recent economic data from the Eurozone has provided some underlying support for the euro. The Eurozone’s core CPI for October and Germany’s September retail sales figures both came in stronger than expected.
⚡ A key factor supporting the euro is the perceived divergence in central bank policy. The European Central Bank (ECB) is widely seen as having concluded its interest rate-cut cycle, in contrast to the Federal Reserve, which is anticipated to implement further rate cuts totaling at least one percentage point by the end of 2026.
📊 The Eurozone’s October CPI eased slightly to +2.1% year-on-year, matching expectations, while the core CPI remained stable at +2.4% year-on-year, exceeding the forecast of +2.3%. In Germany, retail sales for September saw a modest increase of +0.2% month-on-month and +2.8% year-on-year, slightly surpassing market expectations.
📊 Current swap rates suggest a low 4% probability of a 25 basis point rate cut by the ECB at its policy meeting on December 18.
The USD/JPY pair is trading slightly lower today, down by -0.03%, as the yen consolidates just above its 8.5-month low against the dollar. Stronger-than-expected Japanese economic data, including September’s industrial production and October’s Tokyo CPI, have provided a hawkish signal for the Bank of Japan’s (BOJ) policy and supported the yen. However, weaker-than-expected retail sales figures for September in Japan have limited the yen’s gains.
📊 Japan’s industrial production for September surged by +2.2% month-on-month, well above the expected +1.5% and marking the most significant increase in seven months.
📊 In contrast, Japan’s retail sales for September rose only +0.3% month-on-month, falling short of the projected +0.8% increase.
📊 Tokyo’s Consumer Price Index (CPI) for October showed an annual increase of +2.8%, surpassing expectations of +2.4%. The core CPI, excluding fresh food and energy, also rose by +2.8% year-on-year, exceeding the anticipated +2.6%.
Precious Metals Mixed as Dollar Strength and Equity Rally Weigh
December COMEX gold futures are trading higher today, up +0.52% at $20.70, while December COMEX silver futures are slightly down by -0.02% at -$0.011.
Precious metals are experiencing mixed trading conditions, with silver retreating from a recent one-week high. Gold prices are benefiting from carryover support stemming from increased central bank gold purchases, as reported by the World Gold Council, which indicated global central banks acquired 220 metric tons in Q3, a 28% increase from the previous quarter.
⚡ Underlying safe-haven demand for precious metals remains robust due to the ongoing U.S. government shutdown, uncertainties surrounding U.S. tariffs, geopolitical risks, consistent central bank buying, and political pressures on the Federal Reserve’s independence. Furthermore, recent weaker-than-expected U.S. economic data has strengthened the outlook for the Fed to maintain or even continue cutting interest rates, which is generally a bullish factor for precious metals.
However, gains in precious metals are being capped by the dollar index’s ascent to a 2.75-month high and the current rally in the stock market, which has diminished safe-haven demand. Easing U.S.-China trade tensions have also contributed to a reduction in this demand. Silver prices, in particular, have faced pressure due to signs of weakness in Chinese industrial metals demand, following a worse-than-expected contraction in China’s October manufacturing PMI.
📈 Since reaching record highs earlier this month, precious metals have been subject to significant long liquidation. This week’s rally in the S&P 500 to a new all-time high has further curbed safe-haven demand, leading to substantial long liquidations and outflows from precious metals ETFs. Gold ETF holdings have seen a decline from their three-year high, and silver ETF holdings have dropped from their 3.25-year peak.
📊 China’s manufacturing PMI for October contracted more sharply than anticipated, falling by 0.8 to 49.0, marking the steepest pace of contraction in six months and missing the forecast of 49.6.
Final Thoughts
The U.S. dollar is displaying strength, driven by hawkish Federal Reserve signals and improved economic data, despite the ongoing government shutdown. Meanwhile, currency markets are showing mixed trends, with the euro facing headwinds and the yen finding some support from domestic economic reports. Precious metals are experiencing conflicting pressures, with gold supported by safe-haven demand and central bank activity, while silver is affected by concerns over Chinese demand and broader market sentiment.