Market Summary
- The US Dollar Index (DXY) experienced a slight decline of 0.04%.
- Weaker-than-expected US CPI data and a drop in US 10-year Treasury yields contributed to dollar weakness.
- Contrasting factors include a stronger US manufacturing and services PMI, but the ongoing government shutdown weighs on the dollar.
- Markets are overwhelmingly pricing in a Federal Reserve rate cut at the upcoming FOMC meeting.
- Euro and Yen saw gains against the dollar, while gold and silver prices experienced mixed movements.
Dollar Weighed Down by Mixed Economic Signals
The US Dollar Index (DXY) is currently trading down by 0.04%, influenced by a confluence of economic data. A slightly softer-than-expected US Consumer Price Index (CPI) report has provided the Federal Reserve with increased leeway for potential interest rate reductions. Further pressure on the dollar comes from a 1.4 basis point decline in the US 10-year Treasury note yield, which diminishes the dollar’s appeal from an interest rate differential perspective.
The September US CPI report indicated a monthly increase of 0.3% and an annual increase of 3.0%, both falling slightly short of market expectations of 0.4% and 3.1% respectively. Similarly, the core CPI for September showed a 0.3% monthly rise and a 3.1% annual increase, also softer than the anticipated 0.2% monthly and 3.1% annual figures. Despite these milder readings, the annual CPI reached a 16-month high, mirroring August’s figures, and the core CPI remains significantly above the Fed’s 2.0% inflation target.
💡 On the bearish side for the dollar, the final August University of Michigan US consumer sentiment index saw a decline, falling 1.4 points to 53.6, which was below the market expectation of a 0.5 point drop to 54.5.
Conflicting Economic Indicators Impact Dollar’s Trajectory
In contrast to the inflation data, recent manufacturing and services Purchasing Managers’ Index (PMI) reports offer a more optimistic outlook for the US economy. The October S&P US manufacturing PMI report improved by 0.2 points to 52.2, surpassing the expectation of remaining unchanged at 52.0. Additionally, the October S&P US services PMI showed a notable increase of 1.0 point to 55.2, defying market forecasts of a 0.7 point decline to 53.5. These stronger PMI figures suggest resilience in key sectors of the US economy.
⚡ The ongoing US government shutdown continues to cast a shadow over the dollar. The longer the shutdown persists, the greater the potential negative impact on the US economy, which could further compel the Federal Reserve to consider interest rate cuts.
📊 Market participants are heavily factoring in a rate cut by the Federal Reserve. Swaps are currently indicating a 97% probability of a 25 basis point rate reduction at the upcoming FOMC meeting scheduled for October 28-29.
Euro Strengthens Amidst Dollar Weakness and Positive Eurozone Data
The EUR/USD currency pair is currently trading up by 0.06%, with the euro finding support from the prevailing weakness in the US dollar. This strengthens the euro’s position in the foreign exchange market.
⚡ The Eurozone’s economic indicators are also providing a boost. Preliminary data for October shows the HCOB Eurozone manufacturing PMI rose by 0.2 points to 50.0, exceeding market expectations of an unchanged reading at 49.8. Furthermore, the preliminary October HCOB Eurozone services PMI increased by 1.3 points to 52.6, significantly outperforming market expectations of a 0.1 point drop to 51.2. These positive readings suggest a strengthening economic landscape within the Eurozone.
📍 The European Central Bank (ECB) is unlikely to cut rates in the immediate future. Swaps suggest only a 1% chance of a 25 basis point rate cut by the ECB at its policy meeting on October 30.
Yen Rallies as Dollar Weakens
The USD/JPY currency pair is trading higher today by 0.16%, indicating that the Japanese Yen is gaining strength against the US dollar. This movement is largely a mirror of the dollar’s general weakness observed in the broader market.
Gold and Silver Experience Volatility Amidst Safe-Haven Demand and Technical Factors
December COMEX gold futures are currently down by $2.20, or 0.05%, while December COMEX silver futures are lower by $0.169, or 0.35%. Gold prices are experiencing downward pressure due to negative technical sentiment stemming from significant long liquidation earlier in the week. This is occurring despite the supportive implications of the milder US CPI report for gold.
📍 Precious metals are continuing to benefit from their status as safe-haven assets. This demand is amplified by ongoing uncertainties, including the US government shutdown, trade tariff disputes, geopolitical risks, central bank purchasing, US-China trade tensions, and concerns about political influence on the Federal Reserve’s independence.
⚡ Recent United States economic data that has fallen short of expectations is bolstering the outlook for the Federal Reserve to maintain or even increase its pace of interest rate cuts. This prospect is generally bullish for precious metals.
📊 Further support for precious metals comes from strong fund inflows into gold and silver Exchange Traded Funds (ETFs). Gold holdings in ETFs reached a three-year high on Tuesday, and silver ETF holdings similarly hit a 3.25-year high on the same day.
Expert Summary
The US dollar is facing headwinds from a slightly weaker-than-expected CPI report and falling Treasury yields, despite some positive manufacturing data. The market is heavily anticipating a Federal Reserve rate cut. The Euro and Yen are showing gains against the dollar, while gold and silver are experiencing mixed price action influenced by safe-haven demand and technical factors.