Dollar Little Changed Ahead of Wednesday’s FOMC Decision

The dollar index (DXY00) on Tuesday recovered from early losses and was little changed ahead of Wednesday’s FOMC decision.  The market has priced in a 100% chance the Fed will raise the federal funds target range by +75 bp on Wednesday.  The dollar recovered its losses Tuesday after T-note yields erased early declines and moved higher after the stronger-than-expected U.S. job openings and ISM reports boosted speculation the Fed will maintain its aggressive rate hike campaign.  Also, weakness in stocks boosted the liquidity demand for the dollar.

Tuesday’s U.S. economic news was stronger than expected and bullish for the dollar.  The Sep JOLTS job openings report unexpectedly rose +437,000 to 10.717 million, showing a stronger labor market than expectations of a decline to 9.750 million.  Also, the Oct ISM manufacturing index fell -0.7 to 50.2, stronger than expectations of 50.0.  In addition, Sep construction spending unexpectedly rose +0.2% m/m, stronger than expectations of a -0.6% m/m decline.

EUR/USD (^EURUSD) Tuesday gave up an early rally and posted modest losses.  EUR/USD Tuesday initially moved higher on hawkish ECB comments.  ECB President Lagarde said interest rates have to rise further to ensure that inflation returns to the ECB's 2% target over the medium term.  Also, ECB Governing Council member Nagel said price pressures in the Eurozone have become broader, and the ECB is still a long way away from ending interest rate hikes.

ECB President Lagarde said, "inflation is still too high throughout the Eurozone," and interest rates have further to rise to ensure that inflation returns to the ECB's 2% target over the medium term.

The German Sep import price index unexpectedly fell -0.9% m/m, weaker than expectations of +0.6% m/m and the biggest decline in nearly 2-1/2 years.

USD/JPY (^USDJPY) fell by -0.32%.  The yen saw early support from news that Japan’s Oct vehicle sales rose +19.7% y/y, the most in 17 months.  However, the yen fell back from its best levels after stronger-than-expected U.S. economic news helped T-note yields recover from early declines.

December gold (GCZ2) on Tuesday closed up +9.00 (+0.55%), and December silver (SIZ22) closed up +0.548 (+2.87%).  Precious metals prices Tuesday posted moderate gains, with silver climbing to a 3-week high.  A weaker dollar Tuesday was bullish for metals prices.  Silver prices jumped Tuesday on speculation China might soon end its Covid Zero policy, which would benefit economic growth and industrial metals demand. Gold continues to be undercut by fund liquidation as long positions in gold ETF’s dropped to a 2-1/2 year low Monday.

• Stocks Turn Lower as Strong U.S. Economic Data Fuels Hawkish Fed
• Dollar Rallies on Stock Weakness and Higher T-note Yield
• Stocks Tumble on Weakness in Chip Stocks and Higher Bond Yields
• Dollar Sees Support From Positive U.S. Consumer News