The dollar index (DXY00) on Wednesday rose by +0.17%. The dollar on Wednesday recovered from a 1-week low and moved higher on hawkish comments from Fed Chair Powell, who said he doesn’t think it’s likely the Fed will cut rates in March. The dollar Wednesday initially moved lower on weaker-than-expected U.S. economic reports on Jan ADP employment and Q4 employment cost index, dovish factors for Fed policy.
Wednesday’s U.S. economic news was weaker than expectations and was bearish for the dollar. The Jan ADP employment change rose +107,000, weaker than expectations of +150,000. Also, the Q4 employment cost index rose +0.9% q/q, weaker than expectations of +1.0% q/q and the smallest pace of increase in 2-1/2 years. In addition, the Jan MNI Chicago PMI unexpectedly fell -1.2 to 46.0, weaker than expectations of an increase to 48.0.
As expected, the FOMC kept the fed funds target range at 5.25%-5.50% and said risks to achieving its employment and inflation goals "are moving into better balance." The FOMC removed the reference to potential additional policy firming but pushed back on any immediate easing of monetary policy when it said it "does not appear it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%."
Fed Chair Powell said the Fed intends to move carefully in dialing back interest rates, and he "doesn't think it’s likely" the Fed will cut interest rates in March.
The markets are discounting the chances for a -25 bp rate cut at 37% for the March 19-20 FOMC meeting and have fully discounted (+123%) that -25 bp rate cut by the following meeting on April 30-May 1.
EUR/USD (^EURUSD) on Wednesday fell by -0.42%. The euro Wednesday relinquished an early rally and posted moderate losses after hawkish comments from Fed Chair Powell pushed the dollar higher. Also weighing on the euro was Wednesday’s consumer price report from Germany that showed German Jan CPI rose less than expected, a dovish factor for ECB policy.
ECB Vice President Guindos said inflation has brought mostly positive surprises recently and will be slightly lower than the ECB predicted.
German Jan CPI (EU harmonized) eased to +3.1% y/y from +3.8% y/y in December, better than expectations of +3.2% y/y.
The German Jan unemployment change unexpectedly fell -2,000, showing a stronger labor market than expectations of an increase of +11.000. The Jan unemployment rate was unchanged at 5.8%, a stronger labor market than expectations of 5.9%.
German Dec retail sales unexpectedly fell -1.6% m/m, weaker than expectations of a +0.6% m/m increase.
Swaps are pricing in the chances for a -25 bp rate cut by the ECB at 23% for its next meeting on March 7 and have fully discounted (103%) that same rate cut at the following meeting on April 11.
USD/JPY (^USDJPY) on Wednesday fell by -0.25%. The yen on Wednesday rallied to a 2-week high against the dollar. The yen found support Wednesday from the summary of the BOJ’s Jan 22-23 policy meeting that showed policymakers were getting closer to raising interest rates. The yen fell back from its best levels after hawkish comments from Fed Chair Powell boosted the dollar.
The Japan Jan consumer confidence index rose +0.8 to a 2-year high of 38.0, stronger than expectations of 37.5.
Japan Dec industrial production rose +1.8% m/m, weaker than expectations of +2.5% m/m.
Japan Dec retail sales unexpectedly fell -2.9% m/m, weaker than expectations of +0.2% m/m and the largest decline in 3-1/2 years.
The summary of the BOJ's Jan 22-23 policy meeting stated policymakers were getting closer to raising interest rates for the first time since 2007. One BOJ member said. "It seems that conditions for policy revision, including the termination of the negative interest rate policy, are being met."
Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 24% for its next meeting on March 19 and at 80% for the following meeting on April 26.
February gold (GCG4) Wednesday closed +16.90 (+0.83%), and Mar silver (SIH24) closed -0.056 (-0.24%). Precious metals on Wednesday settled mixed, with gold posting a 2-week high. Weakness in the dollar Wednesday was bullish for metals prices. Also, Wednesday’s U.S. and Eurozone economic reports were central bank-friendly and bolstered the chances for interest rate cuts from the Fed and ECB. Geopolitical risks remain in the Middle East, boosting safe-haven demand for precious metals.
Gold prices fell more than -$12 an ounce in post-market trading Wednesday after Fed Chair Powell said he doesn’t believe the FOMC will cut interest rates in March. Silver prices were under pressure Wednesday on weaker-than-expected reports on U.S. Jan MNI Chicago PMI and China Jan manufacturing PMI, bearish factors for industrial metals demand. Also, gold is under pressure from the ongoing long liquidation of gold by funds after long gold holdings in ETFs fell to a 4-year low Tuesday.
More Forex News from Barchart
- Stocks Slide as Tech Earnings Disappoint
- Dollar Slips Ahead of Wednesday’s FOMC Meeting Outcome
- Stocks Struggle as Bond Yields Rise on Strong JOLTS Job Openings Report
- Dollar Gives up Early Gains as Bond Yields Fall on Lower Treasury Borrowing Estimates
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
/Microsoft%20Corporation%20logo%20on%20phone-by%20rafapress%20via%20Shuterstock.jpg)
