Dollar Recovers on Hawkish Fed Comments

The dollar index (DXY00) on Monday rose by +0.03%.  The dollar on Monday recovered from early losses and posted modest gains after hawkish Fed comments sparked short covering in the dollar. New York Fed President Williams and Richmond Fed President Barkin said they needed to gain confidence that inflation was moving lower before cutting interest rates. 

The dollar on Monday initially moved lower on some negative carryover from last Friday’s weaker-than-expected US payroll and ISM services reports, which bolstered expectations that the Fed will cut interest rates this year.  Monday’s rally in stocks has also reduced liquidity demand for the dollar.

New York Fed President Williams said the Fed will eventually cut interest rates, but policymakers need to see more evidence things are “moving in the direction we want to see on inflation.” 

Richmond Fed President Barkin said the strength of the US labor market offers the Fed time to gain confidence that inflation is moving sustainably lower before lowering borrowing costs.  He added that he is more worried about the risk that inflation runs too high for too long than about the economy unduly weakening.

The markets are discounting the chances for a -25 bp rate cut at 10% for the June 11-12 FOMC meeting and 34% for the following meeting on July 30-31.

EUR/USD (^EURUSD) on Monday rose by +0.08%.  The euro Monday posted modest gains and is just below last Friday’s 3-week high.  Some positive economic news supported the euro after the Eurozone May Sentix investor confidence index rose more than expected to a 2-1/4 year high, and the Eurozone Apr S&P composite PMI was revised upward to an 11-month high. Limiting gains in EUR/USD were dovish comments from ECB Chief Economist Lane and ECB Governing Council member Simkus, who both said they expect the ECB to start cutting interest rates in June.

The Eurozone May Sentix investor confidence index rose +2.3 to a 2-1/4 year high of -3.6, stronger than expectations of -5.0. 

Eurozone Mar PPI fell -7.8% y/y, weaker than expectations of -7.7% y/y.

The Eurozone Apr S&P composite PMI was revised upward by +0.3 to 51.7 from the previously reported 51.4, the fastest pace of expansion in 11 months.

ECB Chief Economist Lane said recent Eurozone data have made him more certain that inflation is returning to the ECB’s 2% goal, raising the likelihood of a first interest rate cut in June.

ECB Governing Council member Simkus said he expects the ECB to cut interest rates three times this year, starting with a planned move in June.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 95% for its next meeting on June 6.

USD/JPY (^USDJPY) Monday rose by +0.58%.  The yen is moderately lower today due to central bank divergence. Japanese government bond yields are well below the bond yields of other G-7 countries, which is bearish for the yen. Gains in the yen accelerated Monday after T-note yields gave up an early advance and turned lower.  However, the yen has underlying support on concern that Japanese authorities may step into the currency market again to support the yen after intervening in the forex market twice last week in support of the yen. Trading activity in the yen was subdued Monday with markets in Japan closed for the Children’s Day holiday. 

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 21% for the June 14 meeting.

June gold (GCM4) on Monday closed up +22.6 (+0.98%), and July silver (SIN24) closed up +0.924 (+3.46%).  Precious metals Monday closed moderately higher.  Lower global bond yields on Monday were supportive of precious metals.  Also, precious metals rose on carryover support from last Friday’s weaker-than-expected US payroll and ISM services reports that bolstered optimism that the Fed will cut interest rates this year. 

Bearish factors for precious metals include today’s stock rally, which curbed safe-haven demand for precious metals.  Also, hawkish comments from New York Fed President Williams and Richmond Fed President Barkin were bearish for precious metals after they said they needed to gain confidence that inflation was moving lower before cutting interest rates.  In addition, fund liquidation is negative for gold prices after long gold holdings in ETFs fell to a 4-1/2 year low last Friday. 

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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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