Dollar Rallies on Crude Oil Strength as Hot US CPI Report

The dollar index (DXY00) today is up by +0.45%.  The dollar is climbing today on renewed concerns that the US-Iran ceasefire may break down after President Trump said the current ceasefire was on "life support." Today's +3% surge in crude oil prices also boosts inflation expectations and may prompt the Fed to tighten monetary policy, a supportive factor for the dollar.  The dollar added to its gains on today's stronger-than-expected US Apr CPI report, a hawkish factor for Fed policy.

US Apr CPI rose +3.8% y/y, stronger than expectations of +3.7% y/y and the fastest pace of increase in almost three years. Apr core CPI rose +2.8% y/y, stronger than expectations of +2.7% y/y and the largest increase in six months.

Comments today from Chicago Fed President Austan Goolsbee were hawkish and supportive of the dollar when he said the worst part of today's April CPI report is services inflation and "the Fed has got to be thinking about how do we break the chain of escalating inflation." 

Swaps markets are discounting the odds at 5% for a 25 bp rate cut at the next FOMC meeting on June 16-17.

EUR/USD (^EURUSD) today is down by -0.43%.  The euro is falling today amid a stronger dollar. Also, today's +3% surge in crude oil prices is negative for the Eurozone economy and the euro, as Europe imports most of its energy.  Losses in the euro are limited after the German May ZEW survey expectation of economic growth unexpectedly rose.  Also, hawkish comments from ECB Governing Council member Patsalides were supportive for the euro when he said things are pointing to an ECB rate hike in June. 

The German May ZEW survey expectation of economic growth unexpectedly rose +7.0 to -10.2, stronger than expectations of a decline to -19.5.

ECB Governing Council member Christodoulos Patsalides said, "As things stand, inflation risks are worsening," which points to an ECB interest rate hike in June.

Swaps are discounting an 86% chance of a +25 bp rate hike by the ECB at the next policy meeting on June 11.

USD/JPY (^USDJPY) today is up by +0.27%.  The yen is moving lower today amid a stronger dollar. Also, today's weaker-than-expected report on Japanese March household spending is bearish for the yen.  In addition, today's3 % jump in crude oil prices is negative for the Japanese economy and the yen, as Japan imports more than 90% of its energy needs.  Finally, higher T-note yields today are bearish for the yen.

The Japan Mar leading index CI rose +1.3 to a nearly 4-year high of 114.5, right on expectations.

Japan's Mar household spending fell -2.9% y/y, weaker than expectations of -1.3% y/y and the biggest decline in five months.

The summary of the April 28 BOJ meeting was hawkish and bullish for the yen as one board member said, "It is quite possible that the BOJ will raise the policy interest rate from the next policy meeting onward, even if the future course of the situation in the Middle East remains unclear."

The markets are discounting a +77% chance of a 25 bp BOJ rate hike at the next policy meeting on June 16.

June COMEX gold (GCM26) today is down -26.8 (-0.57%), and July COMEX silver (SIN26) is up +0.057 (+0.07%).

Gold and silver prices gave up an early advance today and turned mixed.  Today's stronger dollar is weighing on metals prices.  Also, higher global bond yields today are bearish for precious metals.  In addition, today's +3% jump in crude oil prices boosts inflation expectations, potentially prompting the world's central banks to tighten monetary policy, a bearish factor for precious metals.  Finally, today's hawkish central bank comments weighed on precious metals prices.  ECB Governing Council member Christodoulos Patsalides said things are pointing toward an ECB interest rate hike in June. Also, Chicago Fed President Austan Goolsbee said the US has an inflation problem.

Precious metals have safe-haven support after the US and Iran failed to come to an agreement to end the war, which could lead to renewed hostilities in the Middle East.  Silver prices also have carryover support from today's rally in copper prices to a 3.5-month high. 

Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 5-month low on March 31 after climbing to a 3.5-year high on February 27.  Also, long holdings in silver ETFs fell to a 9-month low last Tuesday after rising to a 3.5-year high on December 23.

Strong central bank demand for gold is supportive of gold prices, following last Thursday's news that bullion held in China's PBOC reserves rose by +260,000 ounces to 74.64 million troy ounces in April, the largest monthly increase in a year and the eighteenth consecutive month the PBOC has boosted its gold reserves.