Dollar Jumps on Hawkish Fed

The dollar index (DXY00) on Wednesday rose by +0.49%.  The dollar moved higher on Wednesday, supported by stronger-than-expected US economic reports on May retail sales and May pending home sales. The dollar raced to its high on Wednesday afternoon when the FOMC projected higher interest rates later this year. 

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 FOMC, as expected, voted unanimously to keep the fed funds rate target unchanged at 3.50%-3.75%, and removed language on potential additional adjustments to interest rates and declared "the committee will deliver price stability." 

The FOMC's dot plot of interest rate projections showed the committee raised its fed funds rate projection to 3.750% at the end of 2026, up from a prior estimate of 3.375%, implying at least one more 25 bp rate hike this year.  Nine of 18 FOMC participants penciled in at least one more rate hike this year, with six anticipating at least two.

The Fed cut its US 2026 GDP projection to 2.2% from 2.4% in March and boosted its 2026 core PCE projection to 3.3% from 2.7%.

Fed Chair Keven Warsh said he's appointing task forces to examine central bank functions, including communications, the balance sheet, reliance on existing data sources, productivity and jobs, and the Fed's inflation framework.

The swaps markets are discounting the odds at 34% for a +25 bp rate cut hike at the next FOMC meeting on July 28-29.

EUR/USD (^EURUSD) on Wednesday fell by -0.77%, dragged down by a stronger dollar.  Also, Wednesday'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.  

Positives for the euro included the upward revision to the Eurozone May core CPI, a hawkish factor for ECB policy. Also, hawkish comments on Wednesday 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) on Wednesday rose by +0.09%.  The yen erased early gains on Wednesday and fell to a 1.75-month low against the dollar.  The yen retreated as the dollar rallied when the FOMC projected higher interest rates for later this year.  Also, higher T-note yields on Wednesday weighed on the yen. 

The yen initially moved higher on Wednesday amid stronger-than-expected Japanese economic news on April core machine orders and May trade data.  The yen also found support on Wednesday 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 were 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) on Wednesday closed up +27.00 (+0.62%), and July COMEX silver (SIN26) closed up +0.754 (+1.08%).

Gold and silver prices recovered from early losses on Wednesday 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.  In post-market trading on Wednesday afternoon, gold prices fell by more than -$40 an ounce after the FOMC projected higher interest rates later this year. 

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.