Key Takeaways
- The US Dollar Index (DXY) showed little change as a slightly weaker-than-expected US CPI report and a decline in US Treasury yields weighed on the currency.
- The Euro saw gains against the dollar, supported by stronger-than-anticipated Eurozone PMI data.
- Gold and silver prices experienced declines despite dovish inflation data, influenced by technical sentiment and industrial demand outlooks.
- Precious metals continue to benefit from safe-haven demand due to ongoing US government shutdown, geopolitical risks, and central bank buying.
- Market expectations lean heavily towards a Federal Reserve interest rate cut at the upcoming FOMC meeting.
Dollar Index Impacted by Economic Data and Government Shutdown
The US Dollar Index (DXY) finished Friday with minimal change, experiencing pressure from a US CPI report that came in slightly below expectations. This data provided the Federal Reserve with a bit more flexibility to consider interest rate reductions. Additionally, a downtick in the US 10-year Treasury note yield by 0.6 basis points on Friday further diminished the dollar’s appeal by reducing interest rate differentials.
The September US CPI report indicated a monthly increase of +0.3% and a year-over-year rise of +3.0%, both slightly below market forecasts of +0.4% month-over-month and +3.1% year-over-year. Similarly, the core CPI for September saw a monthly increase of +0.2% and a yearly rise of +3.0%, also undershooting expectations of +0.3% and +3.1% respectively. Despite being softer than anticipated, the annual CPI figure matched a 16-month high, and the core CPI remained significantly above the Federal Reserve’s target of +2.0%.
📍 The University of Michigan’s final reading for the US consumer sentiment index in August also contributed to the bearish sentiment for the dollar, falling 1.4 points to 53.6, which was a weaker outcome than the projected 0.5-point drop to 54.5.
Conversely, there were some positive indicators for the dollar. The S&P US manufacturing PMI for October rose by 0.2 points to 52.2, surpassing the expectation of remaining unchanged at 52.0. Furthermore, the S&P US services PMI for October increased by 1.0 point to 55.2, outperforming the forecast of a 0.7-point decline to 53.5.
The ongoing US government shutdown continues to exert downward pressure on the dollar. The longer the shutdown persists, the greater the anticipated impact on the US economy, increasing the likelihood of the Federal Reserve implementing interest rate cuts.
📊 Market participants are currently pricing in a 97% probability of a 25 basis point rate cut at the Federal Open Market Committee (FOMC) meeting scheduled for October 28-29.
Euro Gains Amidst Stronger Eurozone Economic Data
The EUR/USD pair saw an increase of +0.09% on Friday, buoyed by the general weakness observed in the US dollar.
The euro also received support from preliminary data released on Friday, indicating an uptick in the HCOB Eurozone manufacturing PMI for October, which rose by 0.2 points to reach 50.0. This figure exceeded expectations of an unchanged reading at 49.8. Additionally, the HCOB Eurozone services PMI for October climbed by 1.3 points to 52.6, surpassing market expectations for a 0.1-point drop to 51.2.
⚡ Swaps currently reflect a mere 1% chance of a 25 basis point rate cut by the European Central Bank (ECB) at its policy meeting on October 30.
USD/JPY Movements and Precious Metals Performance
The USD/JPY pair experienced a gain of +0.16%, benefiting from the overall weakening trend of the US dollar.
December COMEX gold futures closed Friday down -7.80 (-0.19%), while December COMEX silver futures ended the day lower by -0.118 (-0.24%). Gold prices declined due to negative technical sentiment, attributed to significant long liquidation observed earlier in the week. The downward movement in gold occurred despite the previous day’s dovish US CPI report, which would typically be supportive of the precious metal.
Silver prices found some support from Friday’s stronger-than-expected US PMI report, which positively influenced the outlook for industrial metals demand.
📌 Precious metals continue to attract safe-haven demand, driven by factors such as the persistent US government shutdown, uncertainty surrounding US tariffs, geopolitical tensions, substantial central bank purchases, US-China trade friction, and concerns about President Trump’s influence on the Federal Reserve’s independence.
⚡ Recent economic data from the US has been weaker than anticipated, reinforcing the outlook for continued Federal Reserve interest rate cuts, which generally benefits precious metals.
📈 Precious metals have also seen increased buying interest from funds investing in precious metal ETFs. Prior to a pullback later in the week, gold holdings in ETFs had reached a three-year high by Tuesday, and silver holdings in ETFs attained a 3.25-year high on the same day.
Expert Summary
The US dollar index experienced volatility, influenced by mixed economic data and the ongoing government shutdown, while market sentiment favors an upcoming Fed rate cut. The euro showed resilience against the dollar, supported by robust Eurozone PMI figures. Precious metals faced technical headwinds despite safe-haven inflows, highlighting complex market dynamics.