Key Takeaways
- The US Dollar Index (DXY) saw a minor decrease, influenced by softer-than-expected US CPI data and falling US 10-year Treasury yields.
- While US inflation showed some moderation, it remains elevated, with core inflation significantly above the Federal Reserve’s 2% target.
- Mixed economic indicators, including weaker consumer sentiment juxtaposed with stronger manufacturing and services PMIs, are creating conflicting signals for the dollar.
- The ongoing US government shutdown and market anticipation of potential Federal Reserve rate cuts are contributing to dollar weakness.
- The Euro gained against the dollar, supported by dollar weakness and positive Eurozone PMI figures, while USD/JPY moved slightly higher.
- Gold prices declined despite favourable inflation data, primarily due to technical selling, though precious metals broadly benefit from safe-haven demand and ETF inflows.
Dollar Index Under Pressure Amidst Mixed Economic Signals
The US Dollar Index (DXY) is currently experiencing a slight downturn, marked by a 0.04% decrease. This movement is largely influenced by the recent release of US Consumer Price Index (CPI) data, which fell slightly below market expectations. This softer inflation report may provide the Federal Reserve with greater latitude to consider potential interest rate reductions.
⚡ The dollar’s pressure is further compounded by a decline in the US 10-year Treasury note yield, which dropped by 1.4 basis points. Reduced yields can diminish the appeal of dollar-denominated assets due to narrower interest rate differentials.
US Inflation Data: Subdued but Persistent Price Pressures
The September US CPI report indicated a month-over-month increase of 0.3% and a year-over-year rate of 3.0%. These figures were marginally lower than the projected 0.4% month-over-month and 3.1% year-over-year. Concurrently, the September core CPI, which excludes volatile food and energy components, rose by 0.3% month-over-month and 3.1% year-over-year. While the month-over-month figure was slightly higher than the expected 0.2%, the year-over-year rate met projections.
📊 Despite the slight moderation compared to forecasts, the September CPI report reaffirmed that the year-over-year inflation rate remained at its 16-month high of 3.0%. Furthermore, the core CPI continues to stay significantly above the Federal Reserve’s desired inflation target of 2.0%.
📍 On the bearish side for the dollar, the final August University of Michigan US consumer sentiment index declined by 1.4 points to 53.6, a more substantial drop than the anticipated -0.5 point decrease to 54.5.
Conflicting Economic Indicators Shape Dollar’s Trajectory
Conversely, the dollar found some support from other economic readings. The October S&P US manufacturing PMI report indicated an improvement, rising by 0.2 points to 52.2, surpassing the expectation of remaining unchanged at 52.0. Additionally, the October S&P US services PMI report demonstrated stronger performance, increasing by 1.0 point to 55.2. This represented a notable rebound from the anticipated 0.7-point decline to 53.5.
Government Shutdown and Fed Rate Cut Speculation Impact the Greenback
The dollar continues to contend with headwinds stemming from the ongoing US government shutdown. The prolonged nature of this situation increases the potential impact on the US economy, which could, in turn, elevate the probability of the Federal Reserve implementing interest rate cuts.
💡 Market participants are currently pricing in a high probability, 97%, of a 25 basis point rate cut at the upcoming FOMC meeting scheduled for October 28-29.
Euro Strengthens Amid Dollar Weakness and Positive Eurozone Data
The EUR/USD currency pair is trading higher by 0.06%, with the euro benefiting from the prevailing weakness in the US dollar.
✅ The euro’s upward movement is also being bolstered by recent economic data releases from the Eurozone. The preliminary October HCOB Eurozone manufacturing PMI rose by 0.2 points to 50.0, exceeding expectations of an unchanged reading at 49.8. Furthermore, the preliminary October HCOB Eurozone services PMI increased by 1.3 points to 52.6, a positive surprise compared to market forecasts of a 0.1-point drop to 51.2.
📊 Interest rate swaps suggest a low probability, only 1%, of the European Central Bank (ECB) enacting a 25 basis point rate cut at its October 30 policy meeting.
USD/JPY Trades Higher as Dollar Weakness Provides a Counterbalance
The USD/JPY currency pair is trading up by 0.16%. The Japanese yen is finding support as a direct consequence of the observed weakness in the US dollar.
Gold and Silver Prices Show Divergence Amid Shifting Market Sentiment
December COMEX gold (GCZ25) has declined by 2.2 points, or 0.05%, while December COMEX silver (SIZ25) is down 0.169 points, or 0.35%. Gold prices are experiencing downward pressure driven by negative technical sentiment and significant long liquidation activity earlier in the week. This decline occurred despite the dovish implications of the recent US CPI report, which would typically support gold.
📍 Silver prices, however, are finding some underlying support from the stronger-than-expected US PMI reports released today, which are viewed positively for industrial metals demand.
⚡ Precious metals continue to benefit from their safe-haven appeal, driven by factors such as the ongoing US government shutdown, uncertainties surrounding US tariffs, geopolitical risks, central bank purchasing, US-China trade tensions, and concerns about political influence on the Federal Reserve. Additionally, recent US economic data that has fallen short of expectations reinforces the outlook for potential Federal Reserve interest rate cuts, a bullish factor for precious metals.
📈 Precious metals are also receiving support from increased fund investments in precious metal ETFs. Gold holdings in ETFs recently reached a three-year high, and silver holdings in ETFs similarly hit a 3.25-year high on the same day.
Expert Summary
The US dollar index weakened due to a slightly disappointing US CPI report and declining Treasury yields, though mixed PMI data offered some support. The ongoing government shutdown and market expectations for Federal Reserve rate cuts are contributing to dollar downside. The Euro gained against the dollar on the back of dollar weakness and positive Eurozone manufacturing and services PMIs. Gold saw a dip driven by technical factors, while silver found support from industrial demand outlooks, with both metals benefiting from safe-haven demand.