Dollar Gains and Gold Falls on Hawkish Waller

The dollar index (DXY00) today is up +0.15%, just below Thursday's 6-week high.  The dollar is supported by hawkish comments from Fed Governor Christopher Waller, who said he supports a Fed rate increase if inflation doesn't soon slow.  Gains in the dollar are limited by today's downward revision to the University of Michigan’s May US consumer sentiment index to a record low.  Also, today's rally in stocks curbs liquidity demand for the dollar.

The University of Michigan’s May US consumer sentiment index was revised lower to a record low of 44.8 (data from 1978), weaker than expectations of no change at 48.2.

The University of Michigan’s US May 1-year inflation expectations rate was revised upward to a 9-month high of +4.8% from +4.5%, stronger than the +4.6% expected.  Also, May 5-10 year inflation expectations rate was revised upward to a 7-month high of +3.9%, stronger than expectations of no change at +3.4%.

Fed Governor Christopher Waller said he supports making clear that the Fed's next interest rate move is just as likely to be an increase as "inflation is not headed in the right direction."

Swaps markets are discounting the odds at 0% for a 25 bp rate cut at the next FOMC meeting on June 16-17.

EUR/USD (^EURUSD) is down by -0.21% today, just above Thursday's 6-week low.  The dollar's strength today is undercutting the euro.  However, today's news showing stronger-than-expected German May IFO business confidence and German Jun GfK consumer confidence was supportive for the euro.  Also, hawkish comments today from ECB Governing Council member Alexander Demarco were bullish for the euro when he said the ECB will probably need to hike interest rates at its June meeting.

The German May IFO business confidence index unexpectedly rose +0.4 to 84.9, stronger than expectations of a decline to 84.2.

The German Jun GfK consumer confidence index unexpectedly rose +3.3 to -29.8, stronger than expectations of a decline to -34.0.

ECB Governing Council member Alexander Demarco said, "In June, the ECB will probably need to hike interest rates as we need to send a signal that we are committed to our medium-term 2% inflation target."

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 +0.11%.  The yen is under pressure today from a stronger dollar. Also, today's weaker-than-expected Japan April CPI report was dovish for BOJ policy and bearish for the yen.  In addition, today's 2% rally in the Nikkei Stock Index to a 1-week high reduced safe-haven demand for the yen.

Limiting losses in the yen today are weaker T-note yields.  Also, the relief that the Japanese government won't have to boost bond sales to fund its supplementary budget is supportive for the yen.  In addition, the closer the yen falls to 160 per dollar, the greater the likelihood that Japanese authorities will intervene in forex markets to prop up the yen, as they have done several times recently when the yen fell below that level.

Japan's April national CPI rose +1.4% y/y, weaker than expectations of +1.6% y/y.  Apr national CPI ex-fresh food and energy rose +1.9% y/y, weaker than expectations of +2.2% y/y and the slowest pace of increase in 1.75 years.

Japanese Finance Minister Satsuki Katayama said Japan's supplementary budget will be around 3 trillion yen ($18.9 billion) and that the likely cancellation of some government bond sales from last year's budget would limit the need for fresh government debt issuance for the extra budget.

The markets are discounting a +76% chance of a 25 bp BOJ rate hike at the next policy meeting on June 16.

June COMEX gold (GCM26) today is down -45.70 (-1.01%), and July COMEX silver (SIN26) is down -1.152 (-1.50%).

Gold and silver prices are moving sharply lower today amid a stronger dollar.  Also, today's stock rally has reduced safe-haven demand for precious metals.  Losses in precious metals accelerated today on hawkish central bank comments.  ECB Governing Council member Alexander Demarco said the ECB will probably need to hike interest rates at its June meeting, and Fed Governor Waller said he supports a Fed rate hike if inflation doesn't soon slow. 

Precious metals prices are seeing support on doubts about whether the US and Iran can agree on a peace plan to reopen the Strait of Hormuz.  Also, lower global bond yields today are bullish for precious metals.

Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 5.25-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 9.25-month low on May 5 after rising to a 3.5-year high on December 23.

Strong central bank demand for gold is supportive of gold prices, following 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.