The dollar index (DXY00) is up by +0.23% today. The dollar is moving higher today on signs of strength in the US economy after July personal spending and income rose more than expected and Q2 personal consumption was revised upward. Higher bond yields today have also strengthened the dollar’s interest rate differentials.
Gains in the dollar are limited after July capital goods new orders nondefense ex-aircraft and parts, a proxy for capital spending, rose less than expected. Also, the July core PCE price index, the Fed’s preferred inflation gauge, advanced in line with expectations, a dovish factor for Fed policy. In addition, WTI crude oil is down more than -1% today at a 1.5-week low, which lowered inflation expectations and could persuade the Fed to loosen monetary policy, a negative factor for the dollar.
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US July personal spending rose +0.2% m/m, stronger than expectations of +0.1% m/m. Also, July personal income rose +0.4% m/m, stronger than expectations of +0.2% m/m
The US July core PCE price index, the Fed’s preferred inflation gauge, rose +0.2% m/m and +3.3% y/y, right on expectations.
US July capital goods new orders nondefense ex-aircraft and parts, a proxy for capital spending, rose +0.2% m/m, weaker than expectations of +0.7% m/m, although June was revised upward to +1.7% m/m from the previously reported +1.2% m/m.
US Q2 GDP was left unrevised at 1.5% (q/q annualized), but Q2 personal consumption was revised upward to 3.4% from the previously reported 3.2%. Also, the Q2 core PCE price index was revised upward to 3.6% q/q from the previously reported 3.4% q/q.
The markets are discounting a 40% probability of a +25 bp rate hike at the next FOMC meeting on September 15-16.
EUR/USD (^EURUSD) is down by -0.20% today. The euro is under pressure today from a stronger dollar. However, losses in the euro are contained amid hawkish comments from ECB Executive Board member Isabel Schnabel, who said interest rates in the Eurozone must rise further due to inflation risks. Also, today’s -1% fall in crude oil prices to a 1.5-week low supports the Eurozone economy and the euro, as Europe imports most of its energy.
ECB Executive Board member Isabel Schnabel said, “At the current policy rate, inflation is unlikely to return to target over the medium term, and therefore further tightening will be necessary.”
The markets are discounting a 97% chance of a +25 bp ECB rate hike at its next policy meeting on September 10.
USD/JPY (^USDJPY) is up by +0.11% today. The yen is under pressure today from a stronger dollar and higher T-note yields. The yen also continues to suffer from weak interest rate differentials, with the BOJ’s current policy rate of 1.00%, well below the Fed’s federal funds rate target range of 3.50%-3.75%.
The yen has support from today’s news that showed Japan’s producer service prices accelerated last month, which supports an interest rate hike at next month’s BOJ meeting. Also, today’s -1% fall in crude oil prices to a 1.5-week low is positive for Japan’s economy and the yen, as Japan imports more than 90% of its energy.
Japan’s July PPI services prices rose +3.6% y/y, stronger than expectations of +3.2% y/y.
The yen has underlying support from increased expectations of a BOJ rate hike in either September or October. The government favors a rate hike to support the yen and prevent inflationary pressures stemming from the weak yen. Finally, the yen has ongoing support from the recent coordinated US-Japan intervention and fears that further intervention might be forthcoming if the yen remains weak. The markets are discounting an 85% chance of a +25 bp BOJ rate hike at the September 18 policy meeting.
October COMEX gold (GCV26) is down -17.90 (-0.38%) today, and September COMEX silver (SIU26) is down -0.302 (-0.44%).
Precious metals are sliding today amid a stronger dollar. Higher global bond yields are also weighing on precious metals today. In addition, hawkish comments today from ECB Executive Board member Isabel Schnabel undercut precious metals when she said interest rates in the Eurozone must rise further due to inflation risks.
Losses in precious metals are limited today after the US July core PCE price index, the Fed’s preferred inflation gauge, advanced as expected, which eases inflation concerns and could persuade the Fed to loosen monetary policy, a bullish factor for precious metals. Also, today’s -1% decline in crude oil prices lowers inflation expectations and could prompt the world’s central banks to loosen monetary policy, a supportive factor for precious metals.
Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 4-month high today. Long holdings in silver ETFs also rose to a 4.75-month high on Tuesday.
Strong central bank demand for gold is supportive of gold prices, following the Aug 7 news that bullion held in China’s PBOC reserves rose by +640,000 ounces to 76.08 million troy ounces in July, the twenty-first 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. This article was originally published on Barchart.com