Key Takeaways
- The US Dollar Index experienced downward pressure due to market expectations of potential Federal Reserve rate cuts and the conclusion of quantitative tightening.
- Positive economic data, including reports from the Richmond Fed and consumer confidence, offered some support to the dollar.
- A preliminary US-China trade agreement lessened the dollar’s safe-haven appeal, while the ongoing US government shutdown continued to be a drag on its performance.
- The euro strengthened against the dollar, supported by divergent central bank policies, while the yen found strength from positive political and trade developments.
- Gold prices declined due to profit-taking and reduced safe-haven demand, though underlying economic uncertainties continue to provide support.
Dollar Index Under Pressure Amid FOMC Anticipation
The dollar index saw a slight decrease, adopting a cautious stance as markets awaited the Federal Open Market Committee (FOMC) meeting results. The prevailing sentiment leaned towards a dovish outcome, signaling possible interest rate reductions and the end of quantitative tightening. A dip in the 10-year T-note yield also contributed to the pressure on the dollar.
The prolonged US government shutdown continues to impact the dollar’s trajectory. An extended shutdown increases the likelihood of negative economic consequences, potentially prompting the Federal Reserve to consider further adjustments to interest rates.
📌 The dollar found some support from economic data releases that exceeded expectations, including the Richmond Fed manufacturing index and US consumer confidence figures.
Market Expectations for Federal Reserve Policy
Market participants are largely anticipating a 25 basis point rate cut from the FOMC at the conclusion of their meeting, leading to a potential adjustment in the federal funds target range. Furthermore, there is a considerable market expectation for an additional 25 basis point cut at a subsequent meeting. Projections suggest a cumulative rate cut by the end of 2026, which would significantly lower the effective federal funds rate from its current level.
The upcoming FOMC meeting will not feature an updated Summary of Economic Projections, meaning the dot plot will remain unchanged. Consequently, market observers will closely follow Federal Reserve Chair Powell’s post-meeting press conference for insights into the future direction of interest rates, in the absence of additional commentary from other Fed officials.
⚡ The market anticipates the FOMC will announce the cessation of its quantitative tightening program, a process involving the reduction of its balance sheet. Ending quantitative tightening is generally viewed as positive for equity and bond markets, as it would alleviate further liquidity withdrawal from the US financial system.
Key Economic Data Releases
The FHFA US House Price Index for August showed a stronger month-over-month increase than anticipated, defying forecasts that predicted a decline. Similarly, the S&P CoreLogic CS US 20-city house price index demonstrated growth both month-over-month and year-over-year, surpassing expectations in both metrics.
📊 The Richmond Fed manufacturing index for October indicated a significant improvement, experiencing a substantial rise from its previous reading. This figure considerably outperformed the predicted increase.
📍 The Conference Board US consumer confidence index for October registered a slight decrease from its revised figure; however, this outcome was better than market expectations.
Impact of US-China Trade Developments
On Monday, the dollar experienced a reduction in safe-haven demand following reports of a tentative trade agreement reached between US and Chinese negotiators over the weekend. This agreement is slated for finalization at the upcoming summit between Presidents Trump and Xi, effectively removing the immediate threat of previously imposed tariffs on Chinese imports.
✅ China has reportedly agreed not to restrict rare earth metal exports for at least one year and has committed to purchasing a substantial volume of US soybeans. Progress was also noted regarding shipping fees and US demands concerning the crackdown on fentanyl exports. Additionally, there is a possibility of an agreement allowing continued US access to TikTok.
Currency Market Movements
Euro (EUR/USD)
The EUR/USD pair saw an increase, benefiting from the observed weakness in the US dollar.
💡 The euro continues to gain from a divergence in central bank policies. The European Central Bank (ECB) is widely perceived to have concluded its rate-cut cycle, while the Federal Reserve is still expected to implement further rate reductions.
📊 Current swap market pricing indicates a minimal probability of a rate cut by the ECB at its upcoming policy meeting.
Japanese Yen (USD/JPY)
USD/JPY experienced a decline on Tuesday, with the Japanese yen strengthening due to enhanced confidence in Japan’s political and trade standing. Positive remarks from President Trump regarding Japan’s new Prime Minister eased concerns about potential US tariffs on Japan.
⚡ The yen also received support after Japan’s Minister for Growth Strategy indicated that Japanese authorities would monitor the economic impact of yen weakness, hinting at possible supportive measures.
💡 The market consensus suggests the Bank of Japan will maintain its policy rate at its upcoming meeting. Japanese swap rates indicate only a low probability of a rate hike.
Precious Metals Performance
December COMEX gold futures closed lower, while December COMEX silver futures finished higher.
📈 December gold prices reached a three-week low on Tuesday, driven by sustained long liquidation following a significant rally in the preceding two months. Precious metals have also been affected this week by diminished safe-haven demand stemming from the preliminary US-China trade agreement.
📍 Despite recent price retreats, precious metals retain fundamental safe-haven support due to persistent geopolitical risks, central bank acquisitions, political pressures on the Fed’s independence, and economic uncertainties. Furthermore, weaker-than-expected recent US economic data bolsters the outlook for continued Fed rate cuts, which typically supports precious metals.
📊 Precious metals are currently facing pressure from ETF outflows and substantial long liquidation. Holdings in gold ETFs have decreased from a three-year high, and silver ETF holdings have also fallen from a multi-year peak.
Expert Summary
The US dollar faced headwinds from anticipated Federal Reserve rate cuts and ongoing economic uncertainties, although some domestic economic data provided partial support. Developments in US-China trade relations influenced currency markets, with the euro and yen showing gains, while safe-haven demand for the dollar diminished. Gold prices experienced a downturn, influenced by profit-taking and reduced safe-haven flows, notwithstanding persistent underlying supportive factors.