Dollar Gains on Better-Than-Expected US Economic News

The dollar index (DXY00) today is up by +0.12%.  The dollar is moving higher today, supported by stronger-than-expected US economic reports on May retail sales and May pending home sales. Also, short covering ahead of today's conclusion of the 2-day FOMC meeting is supportive of the dollar. 

The dollar's focus will turn to the conclusion of the 2-day FOMC meeting today, the first under the leadership of new Fed Chair Kevin Warsh.  While the Fed is expected to keep interest rates unchanged, the spotlight will be on how Mr. Warsh navigates the post-meeting press conference and the outlook for inflation.

US May retail sales rose +0.9% m/m, stronger than expectations of +0.6% m/m.  Also, May retail sales ex-autos rose +0.8% m/m, stronger than expectations of +0.6% m/m.

US May pending home sales rose +3.8% m/m, stronger than expectations of +0.9% m/m and the biggest increase in 20 months.

The swaps markets are discounting the odds at 5% for a +25 bp rate cut hike at the conclusion of today's FOMC meeting.

EUR/USD (^EURUSD) today is down by -0.14%, weighed down by a stronger dollar.  Also, today's decline in the German 10-year Bund yield to a 1.75-month low of 2.914% weakened the euro's interest rate differentials and is bearish for the euro.  

Losses in the euro are limited today after the Eurozone May core CPI was revised upward, a hawkish factor for ECB policy.  Also, hawkish comments today from Governing Council member Gediminas Simkus were supportive of the euro, as he said that at least one more rate hike from the ECB was probable. 

Eurozone May core CPI was revised upward to 2.6% y/y from the previously reported 2.5% y/y, the strongest pace of increase in 13 months.

ECB Governing Council member Gediminas Simkus said that the "pass-through of the increase in energy and other raw material prices to the market has already occurred," and "at least one more rate increase is certainly more likely than not."

The markets are discounting a +16% chance for a +25 bp rate hike by the ECB at its next policy meeting on July 23.

USD/JPY (^USDJPY) today is down by -0.10%.  The yen is moving higher today on stronger-than-expected Japanese economic news on April core machine orders and May trade data.  The yen also found support today after the chairman of Japan's cross-party policy group proposed cutting Japan's consumption tax on food to 1%, potentially boosting Japanese consumer spending.

Japan Apr core machine orders rose +8.7% m/m, stronger than expectations of +0.5% m/m.

Japan's trade data was mixed, with May exports rising 17.0% y/y, stronger than the 16.5% y/y expected and the most in 3.5 years.  May imports rose +12.5% y/y, the most in 16 months, but weaker than expectations of +12.8% y/y.

The markets are discounting a +1% chance of a +25 bp BOJ rate hike at the next policy meeting on July 31.

August COMEX gold (GCQ26) today is up +7.00 (+0.16%), and July COMEX silver (SIN26) is up +0.387 (+0.55%).

Gold and silver prices recovered from early losses today and moved higher.  Precious metals have carryover support from Monday, when the US and Iran agreed to a peace accord that allows for the reopening of the Strait of Hormuz, which has hammered crude oil prices, lowering inflation expectations and potentially persuading the world's central banks to pursue easier monetary policies, a bullish factor for precious metals. 

Gains in metals are limited today amid a stronger dollar.  Also, strength in stocks today has curbed safe-haven demand for precious metals.  In addition, long liquidation pressures are weighing on precious metals ahead of the conclusion of the 2-day FOMC meeting later today. 

Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 7.25-month low on Tuesday, after reaching a 3.5-year high on February 27.  Also, long holdings in silver ETFs fell to a 10.5-month low on Monday from the 3.5-year high posted 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 +320,000 ounces to 74.96 million troy ounces in May, the largest monthly increase in 17 months, and the nineteenth consecutive month the PBOC boosted its gold reserves.