Dollar Strengthens and Gold Sinks on the Fed's Hawkish Policy Update

The dollar index (DXY00) today rallied to a 13-month high, up by 0.54%. The dollar is climbing today on carryover support from Wednesday, when the FOMC projected higher interest rates later this year.  Today's US economic news is also supportive of the dollar as weekly jobless claims fell as expected and the June Philadelphia Fed business outlook survey rose more than expected.

On the negative side for the dollar is today's -2% decline in WTI crude oil prices to a 3.5-month low, which lowers inflation expectations and could potentially allow the Fed to pursue easier monetary policies, a bearish factor for the dollar.  Also, today's stock rally has reduced liquidity demand for the dollar.

US weekly initial unemployment claims fell by -4,000 to 226,000, close to expectations of 225,000.

The US Jun Philadelphia Fed business outlook survey rose +10.7 to 10.3, stronger than expectations of 10.0.

US May leading indicators rose +0.1% m/m, right on expectations.

The swaps markets are discounting the odds at 32% for a +25 bp rate cut hike at the next FOMC meeting on July 28-29.

EUR/USD (^EURUSD) fell to a 2.5-month low today and is down by -0.25%.  The strength of the dollar is the main bearish factor for the euro today. Losses in the euro are limited today amid hawkish comments from ECB Governing Council member Martin Kocher, who said the ECB is ready to act at any time to ensure inflation comes down to its 2% target.  Also, today's -2% fall in crude oil prices to a 3.5-month low is supportive for the Eurozone economy and the euro, as Europe imports most of its energy.   

ECB Governing Council member Martin Kocher said consumer prices will remain higher for some time in the Eurozone despite an agreement to end the war in the Middle East, and that the ECB is ready to act at any time to ensure inflation returns to its 2% target.

The markets are discounting a +17% chance for a +25 bp rate hike by the ECB at its next policy meeting on July 23.

USD/JPY (^USDJPY) today is up by +0.14%.  The yen tumbled to a 23-month low against the dollar today as the dollar strengthened following the Fed's hawkish stance on Wednesday, which projected higher interest rates later this year.  Also, today's rally in the Nikkei Stock Index to a new record high has reduced safe-haven demand for the yen. 

Losses in the yen are limited by today's -2% fall in crude oil prices to a 3.5-month low, which is supportive of Japan's economy and the yen, as Japan imports more than 90% of its energy.   erased early gains on Wednesday and fell to a 1.75-month low against the dollar.  Also, with the yen firmly above 160 per dollar, intervention risks have increased, as Japanese authorities have intervened in the forex market several times in the past when the yen reached 160 per dollar. 

The markets are discounting a +2% chance of a +25 bp BOJ rate hike at the next policy meeting on July 31.

August COMEX gold (GCQ26) today is down -118.40 (-2.70%), and July COMEX silver (SIN26) is down -3.872 (-5.47%).

Gold and silver prices are plummeting today due to dollar strength, as the dollar index rallied to a 13-month high. Also, precious metals are falling on a negative carryover from Wednesday, when the FOMC projected higher interest rates later this year.  In addition, President Trump's action on Wednesday night to sign a preliminary deal to end the war in the Middle East sparked a rally in equity markets and reduced safe-haven demand for precious metals. 

A supportive factor for precious metals is today's decline in crude oil prices to a 3.5-month low, which lowers inflation expectations and potentially could persuade the world's central banks to pursue easier monetary policies, a bullish factor for precious metals. 

Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 7.25-month low on Wednesday, 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.