Key Takeaways
- The US Dollar Index (DXY00) reached a 2.75-month high, supported by rising T-note yields and hawkish comments from Fed Chair Powell.
- Easing US-China trade tensions are a potential positive for the dollar, but the ongoing US government shutdown poses a risk.
- Markets anticipate a 72% chance of a Fed rate cut in December, with significant cuts expected by 2026.
- The Euro (EUR) recovered from lows as the ECB signaled an end to its rate-cut cycle, supported by better-than-expected Eurozone GDP and German CPI data.
- The Japanese Yen (JPY) weakened significantly against the dollar after the Bank of Japan maintained its interest rates and offered a cautiously optimistic economic outlook.
- Precious metals saw a mixed performance, initially pressured by a strong dollar and rising yields but supported by central bank buying and ongoing uncertainties.
US Dollar Strength Amidst Mixed Economic Signals
The US Dollar Index (DXY00) climbed to a 2.75-month high on Thursday, posting a gain of +0.29%. This upward movement was bolstered by higher T-note yields, which reached a 2.5-week high, and carryover support from Fed Chair Powell’s remarks on Wednesday. Powell indicated that a rate cut at the December FOMC meeting is not a foregone conclusion.
Easing US-Chinese trade tensions, following an agreement to extend a tariff truce and roll back some trade barriers, could provide a tailwind for economic growth prospects.
However, the dollar remains under pressure due to the ongoing US government shutdown. The longer the shutdown persists, the greater the potential negative impact on the US economy and the increased likelihood of the Federal Reserve implementing interest rate cuts.
Market Expectations for Fed Policy
📊 Market participants are pricing in a 72% probability that the FOMC will reduce the fed funds target range by 25 basis points at the upcoming meeting on December 9-10. Current market expectations suggest an overall rate cut of 82 basis points by the end of 2026, bringing the effective federal funds rate down from its current level of 3.88% to 3.06%.
Euro Shows Resilience Amidst ECB Stability
📍 EUR/USD (^EURUSD) fell to a two-week low on Thursday, closing down by -0.32%, primarily due to the dollar’s strengthening. The euro found some support after the European Central Bank (ECB) maintained its interest rates unchanged following its policy meeting.
⚡ Thursday’s Eurozone Q3 GDP report, which exceeded expectations, and the German October CPI report provided hawkish signals for ECB policy and were beneficial for the euro.
✅ Upbeat comments from ECB President Lagarde further boosted the euro, as she noted a mitigation of downside risks to growth.
Central bank divergence is a key factor supporting the euro. The market perceives the ECB as having concluded its rate-cut cycle, while the Federal Reserve is still anticipated to implement further rate reductions, potentially exceeding one percentage point by the end of 2026.
Eurozone Economic Indicators
The Eurozone’s Q3 GDP grew by +0.2% quarter-on-quarter and +1.3% year-on-year, surpassing forecasts of +0.1% and +1.2% respectively.
📊 The Eurozone economic sentiment indicator for October rose by 1.2 points to a 2.5-year high of 96.8, exceeding the expected 96.0.
German October CPI (EU harmonized) increased by +0.3% month-on-month and +2.3% year-on-year, outperforming expectations of +0.2% and +2.2% respectively.
✅ As anticipated, the ECB kept its deposit facility rate stable at 2.00%.
ECB President Lagarde commented that the EU’s trade deal with the US, the ceasefire in the Middle East, and progress in China-US relations have mitigated downside risks to growth.
⚡ Market pricing indicates a slim 5% chance of a -25 basis point rate cut by the ECB at its December 18 policy meeting.
Yen Weakens as BOJ Holds Rates
📈 USD/JPY (^USDJPY) saw a significant increase on Thursday, rising by +0.87%. The Japanese yen depreciated to an 8.5-month low against the dollar following the Bank of Japan’s (BOJ) decision to maintain its interest rates unchanged.
📍 Higher T-note yields on Thursday also exerted downward pressure on the yen.
⚡ Losses in the yen intensified after BOJ Governor Ueda stated that the central bank is not at risk of falling behind the curve despite its decision to keep rates steady.
Bank of Japan’s Stance and Outlook
As expected, the BOJ kept its target policy rate unchanged at 0.50%. BOJ Governor Ueda explained, We held rates steady today as we want to see more data on domestic wage-setting behaviors, while uncertainty remains high in overseas economies.
The BOJ revised its 2025 Japan GDP forecast upward to +0.7% from +0.6% and maintained its 2025 core CPI forecast at 2.7%.
Precious Metals Navigate Mixed Market Forces
December COMEX gold (GCZ25) closed up +15.20 (+0.38%) on Thursday, while December COMEX silver (SIZ25) finished higher by +0.703 (+1.47%).
Precious metals recovered from earlier losses on Thursday, settling higher. Stronger central bank buying of gold is providing support, with the World Gold Council reporting that global central banks purchased 220 metric tons of gold in Q3, a 28% increase from Q2. This brings total central bank gold purchases for the year through September to 634 metric tons.
Signs of economic strength, particularly the faster-than-expected expansion in the Eurozone’s Q3 GDP, are supportive of industrial metals demand, including silver. Additionally, an easing of US-China trade tensions could foster economic growth and bolster demand for industrial metals.
Initially, precious metals moved lower on Thursday due to a stronger dollar, which reached a 2.75-month high. Higher global bond yields also presented a headwind for precious metals. Furthermore, the easing of US-China trade tensions may have reduced safe-haven demand for these assets. A bearish factor carried over from Wednesday was Fed Chair Powell’s comment that A further reduction in the policy rate at the December FOMC meeting is not a foregone conclusion.
Underlying support for precious metals stems from their safe-haven appeal amid the ongoing US government shutdown, uncertainties surrounding US tariffs, geopolitical risks, consistent central bank purchases, and political pressures on the Federal Reserve’s independence. Recent weaker-than-expected US economic data also strengthens the outlook for continued Fed rate cuts, which is typically bullish for precious metals.
Price action in precious metals has been weighed down by long liquidation pressures since posting record highs earlier this month. The recent rally in the S&P 500 to new record highs has also diminished safe-haven demand for precious metals, triggering significant long liquidation and outflows from ETFs. Holdings in gold ETFs have declined from a three-year high reached last Tuesday, and silver ETF holdings have fallen from a 3.25-year high also seen last Tuesday.
Expert Summary
Thursday saw the US Dollar Index reach a multi-month high, influenced by rising yields and Federal Reserve hawkishness, though a government shutdown poses a risk. The Euro showed resilience against a strengthening dollar due to the ECB’s stable policy and positive Eurozone economic data. The Japanese Yen weakened significantly as the Bank of Japan maintained its accommodative stance.
Precious metals experienced a mixed trading session, initially pressured by dollar strength and rising yields but ultimately finding support from central bank buying and ongoing geopolitical and economic uncertainties, despite some profit-taking after recent highs.