The dollar index (DXY00) tumbled to a 6-week low on Thursday and finished down by -0.99%. The dollar retreated on Thursday’s US economic news that showed Q2 GDP growing less than expected and the Jun core PCE prices index easing as expected, dovish factors for Fed policy. The dollar was also under pressure on negative carryover from Wednesday when the FOMC kept interest rates unchanged. Losses in the dollar accelerated on Thursday after the Japanese yen surged on signs of suspected intervention in the forex market by Japanese authorities to prop up the yen.
US weekly initial unemployment claims rose +9,000 to 197,000, showing a stronger labor market than expectations of 200,000.
US Jun personal spending rose +0.3% m/m, weaker than expectations of +0.4% m/m, although May personal spending was revised upward to +0.9% m/m from the previously reported +0.7% m/m. Jun personal income rose +0.2% m/m, weaker than expectations of +0.3% m/m.
The US Jun core PCE price index, the Fed’s preferred inflation gauge, eased to +3.3% y/y from +3.4% y/y in May, right on expectations.
US Q2 GDP rose +1.5% (q/q annualized), weaker than expectations of +2.0%, despite Q2 personal consumption rising +3.2%, stronger than expectations of +2.3%. The Q2 core PCE price index eased to +3.4% from +4.4% in Q1, a slower pace of increase than expectations of +3.5%.
The markets are discounting a 64% probability of a +25 bp rate hike at the next FOMC meeting on September 15-16.
EUR/USD (^EURUSD) rallied to a 6-week high on Thursday and finished up by +0.55%. The euro garnered support on Thursday from a sharply weaker dollar. Also, Thursday’s economic news that showed Eurozone Q2 GDP grew more than expected and the Eurozone Jul economic confidence indicator climbed more than expected to a 5-month high were bullish for the euro. In addition, Thursday’s -1% decline in crude oil prices is supportive for the Eurozone economy and the euro as Europe imports most of its energy.
Eurozone Q2 GDP rose +0.4% q/q and +1.0% y/y, stronger than expectations of +0.2% q/q and +0.7% y/y.
The Eurozone Jul economic confidence indicator rose +1.5 to a 5-month high of 96.9, stronger than expectations of 96.0.
The Eurozone Jun unemployment rate was unchanged at 6.3%, slightly weaker than expectations of 6.2%.
German Jul CPI (EU harmonized) rose to +2.8% y/y from +2.4% y/y in Jun, right on expectations.
The markets are discounting an 84% chance of a +25 bp ECB rate hike at its next policy meeting on September 10.
USD/JPY (^USDJPY) fell sharply by -2.57% on Tuesday. The yen rallied sharply on Thursday to a 2.5-month high against the dollar on signs that Japanese authorities intervened in the currency market to prop up the yen. The yen also found support Thursday amid weakness in the dollar after the FOMC refrained from raising interest rates on Wednesday. In addition, Thursday’s news that showed Japan’s Jul consumer confidence index rose more than expected to a 5-month high was bullish for the yen. Finally, short covering and position squaring boosted the yen ahead of the results of Friday’s BOJ meeting, where the BOJ is expected to keep interest rates unchanged.
The yen has been under pressure from negative carryover from Tuesday on fiscal concerns, amid news that the Japanese government plans to cut the sales tax on food and drinks to 1% for two years. The yen continues to suffer from weak interest rate differentials, with markets discounting no chance of a +25 bp BOJ rate hike at Friday’s policy meeting. The BOJ’s current policy rate of 1.00% is well below the Fed’s federal funds rate target of 3.50%-3.75%.
August COMEX gold (GCQ26) on Thursday closed up +63.80 (+1.58%), and September COMEX silver (SIU26) closed up +0.928 (+1.60%).
Gold and silver prices settled sharply higher on Thursday after the dollar index tumbled to a 6-week low. Precious metals also have carryover support from Wednesday, when the Fed refrained from raising interest rates, and from today, when the BOE kept interest rates unchanged. In addition, escalation of hostilities in the Middle East boosted some safe-haven demand for T-notes after US Central Command said that American forces launched airstrikes against dozens of military targets in Iran today aimed at degrading Iran’s ability to threaten US troops. Iran retaliated by launching drones and missiles into Kuwait and Jordan.
On the bearish side for precious metals was Thursday’s sharp rally in equity markets, which reduced safe-haven demand for precious metals. Also, higher T-note yields on Thursday were negative for precious metals prices.
Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 10-month low last Monday, after reaching a 3.5-year high on February 27. Also, long holdings in silver ETFs fell to a 1-year low on July 14 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 +480,000 ounces to 75.44 million troy ounces in June, the twentieth consecutive month the PBOC boosted its gold reserves.
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.
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