Key Takeaways
- The US dollar’s gains were limited by the government shutdown, which could prompt Federal Reserve rate cuts.
- US existing home sales met expectations in September, while markets price in a high probability of a Fed rate cut.
- Eurozone consumer confidence improved unexpectedly in October, but ECB rate cut expectations remain low.
- Precious metals saw a rebound as US-China trade tensions slightly eased ahead of a planned presidential meeting.
- Safe-haven demand continues to support gold and silver prices, driven by various global risks and central bank activity.
Market Dynamics Amidst Shutdown Concerns
The US dollar experienced moderate gains, though its upward trend was constrained by the ongoing government shutdown. The prolonged shutdown introduces significant risks to the US economy, thereby increasing the likelihood of the Federal Reserve considering interest rate reductions.
In related economic news, the US housing market showed resilience, with existing home sales in September rising by 1.5% month-over-month to reach 4.06 million units. This figure aligned with market forecasts, providing a degree of stability to the sector.
The current market pricing strongly suggests an imminent policy adjustment from the Federal Reserve. Traders are anticipating a high probability, estimated at 99%, for a 25 basis point interest rate cut at the upcoming FOMC meeting scheduled for October 28-29.
Eurozone Confidence Improves, Federal Reserve Rate Cut Expectations Mount
Meanwhile, the Eurozone has reported an unexpected improvement in consumer sentiment. The consumer confidence indicator for October increased by 0.7 points, reaching its highest level in eight months at -14.2. This surpassed the expected decline, signaling a more optimistic outlook among consumers in the region.
Despite this positive economic signal from the Eurozone, the prospect of an interest rate cut from the European Central Bank (ECB) appears slim. Market swaps currently indicate only a 1% chance of the ECB implementing a 25 basis point rate cut at its upcoming policy meeting on October 30.
The Euro/US Dollar (EUR/USD) exchange rate saw a modest increase of 0.06% on Thursday. The euro recovered from earlier dips, partially supported by the better-than-expected consumer confidence data. Furthermore, a widening divergence in monetary policy stances, with the Federal Reserve signaling potential further easing while the ECB appears to be at the end of its cutting cycle, offers underlying support for the euro. However, persistent dollar strength and domestic political challenges within France, particularly concerning budget matters, present headwinds for the euro.
Yen Depreciates Amidst Policy Uncertainty
The US Dollar/Japanese Yen (USD/JPY) pair trended higher, rising by 0.37% on Thursday. The yen weakened to a two-week low against the dollar, influenced by speculation that the newly appointed Japanese Prime Minister might favor a less hawkish monetary policy. Such a shift typically exerts downward pressure on the yen. Additionally, rising US Treasury note yields on Thursday contributed to the negative sentiment surrounding the Japanese currency.
Precious Metals Rebound Driven by Inflation Hedges and Safe-Haven Demand
Gold and silver experienced a significant rebound on Thursday, recovering from earlier declines. This surge followed a sharp increase in crude oil prices, which jumped over 5% after the US imposed sanctions on two major Russian oil producers. The rise in oil prices amplified inflation expectations, subsequently enhancing the attractiveness of precious metals as a hedge against rising prices.
December COMEX gold futures closed up by 1.97%, while December COMEX silver futures gained 2.15% on Thursday.
Prior to this rebound, precious metals had seen a pullback from their daily highs. This dip occurred as signs of de-escalation in US-China trade tensions emerged. The White House announced a meeting between President Trump and President Xi Jinping, scheduled to take place on the sidelines of the Asia-Pacific Economic Cooperation summit in South Korea.
Gold and silver prices had previously reached near-record highs in the preceding week, extending a substantial rally observed over the past two months. Several factors continue to underpin demand for precious metals as safe-haven assets. These include the ongoing US government shutdown, uncertainty surrounding US trade tariffs, broader geopolitical risks, increased purchasing by central banks, persistent US-China trade friction, and actions by President Trump perceived as attempts to influence the Federal Reserve’s independence.
💡 Recent US economic data that has fallen short of expectations further bolsters the outlook for continued interest rate cuts by the Federal Reserve, which is a positive development for precious metals.
📊 Investor flows into precious metal Exchange Traded Funds (ETFs) continue to provide support. Gold holdings in ETFs recently hit a three-year high on Tuesday, and silver holdings in ETFs reached a 3.25-year high on the same day.
Expert Summary
Financial markets are currently navigating a complex environment shaped by the US government shutdown and evolving geopolitical developments. While the US dollar has shown some resilience, concerns about the economic impact of the shutdown persist. Precious metals are drawing attention from investors seeking safe-haven assets amid this prevailing uncertainty.