Dollar Falls Despite Strong US GDP Report

The dollar index (DXY00) is down -0.22%, as bearish underlying dollar sentiment outweighed today's stronger-than-expected US GDP report and the reduced odds for Fed easing.  The markets today reduced the odds for a -25 bp rate cut to 13% from 20% at the next FOMC meeting on January 27-28.

The dollar continues to see underlying weakness as the FOMC is expected to cut interest rates by about -50 bp in 2026, while the BOJ is expected to raise rates by another +25 bp in 2026, and the ECB is expected to leave rates unchanged in 2026. 

The dollar is also under pressure as the Fed boosts liquidity in the financial system, having begun purchasing $40 billion a month in T-bills in mid-December.  The dollar is also being undercut by concerns that President Trump intends to appoint a dovish Fed Chair, which would be bearish for the dollar.  Mr. Trump recently said that he will announce his selection for the new Fed Chair in early 2026.  Bloomberg reported that National Economic Council Director Kevin Hassett is the most likely choice as the next Fed Chair, seen by markets as the most dovish candidate.

US Q3 real GDP rose +4.3% (q/q annualized), stronger than expectations of +3.3% and the Q2 rate of +2.5%.  The Q3 GDP Price Index rose +3.8% (q/q annualized), much stronger than expectations of +2.7% and up from Q2's +2.1%.  The Q3 core PCE Price Index rose +2.9% (q/q annualized), in line with expectations but up from Q2's +2.6%. 

The Conference Board's Dec US consumer confidence index fell by -3.8 points to 89.1 from Nov's revised level of 92.9 (preliminary 88.7), weaker than expectations for a report of 91.0. 

The Dec Philadelphia Fed non-manufacturing index fell by -0.5 points to -16.8 from -16.3 in Nov, which was weaker than expectations for a rise to -15.0.

Oct durable goods orders fell -2.2% m/m, which was weaker than expectations of -1.5%.  Oct durable goods orders ex-transportation rose +0.2% m/m, slightly weaker than market expectations of +0.3%.  Oct core capital goods orders (ex transportation and defense), a proxy for capital spending, rose +0.5% m/m, which was slightly stronger than market expectations of +0.3%.

Nov US industrial production fell -0.1% m/m, slightly weaker than market expectations of +0.1%.  Nov manufacturing production fell -0.4% m/m, weaker than market expectations of +0.1%. 

The Dec Richmond Fed manufacturing index rose by +8 points to -7 from Nov's -15, and was stronger than market expectations of -10.

EUR/USD (^EURUSD) is up by +0.11% on weakness in the dollar. The euro has support from ECB member comments this week, indicating satisfaction with the current outlook for no interest rate cuts.

ECB Governing Council member Yannis Stournaras said today that the ECB is in a "good place" but needs to remain flexible to move policy in either direction.  He said, "If we happen to be in a better or weaker position than expected, we will take appropriate action."

ECB Governing Council member Gediminas Simkus on Monday indicated satisfaction with the current level of interest rates, saying, "We have inflation – headline and core – both now and in the near future, and mid-term, close to the 2% level.  The interest rate is seen by many as at a neutral level. Economic growth has improved though remains sluggish."

Meanwhile, ECB Governing Council member Peter Kazimir said on Monday that the ECB is comfortable with current rates but stands ready to act if conditions change.  He said the current period of on-target inflation and steady economic expansion is "rather fragile" and that risks remain from tariffs and the Russia-Ukraine war.

Swaps are pricing in a 0% chance of a -25 bp rate cut by the ECB at the next policy meeting on February 5.

USD/JPY (^USDJPY) today is down -0.39%.  The yen rallied on Monday and today after Finance Minister Satsuki Katayama said Japan has a "free hand" to intervene against currency moves that are out of line with fundamentals, a reference to the yen's weakness last Friday after the BOJ's rate hike.

The yen has underlying support from last Friday's +25 bp rate hike by the Bank of Japan.  The yen also has support from interest rate differentials, with the 10-year JGB yield today rising by +5.2 bp to a new 26-year high of 2.073%. 

The markets are discounting a 0% chance of a BOJ rate hike at the January 23 policy meeting.

February COMEX gold (GCG26) is up +16.7 (+0.37%), and March COMEX silver (SIH26) is up +1.555 (+2.27%).  Gold and silver today both posted all-time highs on the nearest-futures charts. 

Gold and silver prices are higher today despite the reduced chances for a Fed rate cut after today's strong US GDP report.  The strong GDP report was supportive of silver prices and other industrial metals prices, with copper posting a record high today.

Bullish underlying factors for precious metals include the FOMC's recent announcement of a $40 billion per month liquidity injection into the US financial system.  Precious metals prices are also being boosted by geopolitical risks, as the US is looking to seize two more Venezuelan-linked oil tankers. Also, Ukraine late last week hit an oil tanker from Russia's shadow fleet in the Mediterranean Sea for the first time.

Precious metals have safe-haven support tied to uncertainty over US tariffs and geopolitical risks in Ukraine, the Middle East, and Venezuela.  In addition, precious metals are supported by concerns that the Fed will pursue an easier monetary policy in 2026 as President Trump intends to appoint a dovish Fed Chair. 

Strong central bank demand for gold is supportive of prices, following the recent news that bullion held in China's PBOC reserves rose by +30,000 ounces to 74.1 million troy ounces in November, the thirteenth consecutive month the PBOC has boosted its gold reserves. Also, the World Gold Council recently reported that global central banks purchased 220 MT of gold in Q3, up +28% from Q2. 

Silver has support due to concerns about tight Chinese silver inventories.  Silver inventories in warehouses linked to the Shanghai Futures Exchange on November 21 fell to 519,000 kilograms, the lowest level in 10 years.

Fund demand for precious metals remains strong, with long holdings in silver ETFs rising to a 3.5-year high last Tuesday.