The dollar index (DXY00) on Wednesday fell from a 5.25-month high and finished down by -0.05%. The dollar gave up its advance on Wednesday and posted modest losses after stocks recovered following Tuesday's rout, which dampened liquidity demand for the dollar. Also, the dollar is still under pressure from the ongoing US government shutdown. The longer the shutdown is maintained, the more likely the US economy will suffer and the more likely the Fed will have to cut interest rates.
The dollar initially moved higher on Wednesday after the US Oct ADP employment change rose more than expected, a hawkish factor for Fed policy. The dollar raced tits high on Wednesday when the Oct ISM services index rose more than expected to an 8-month high.
The dollar also garnered some support today from a Washington Post report that said a handful of moderate Senate Democrats are considering voting to end the government shutdown. In addition, the dollar has carry-over support from Fed Chair Powell's warning last week that another rate cut in December is not a foregone conclusion.
The US Oct ADP employment change rose by +42,000, stronger than expectations of +30,000.
The US Oct ISM services index rose +2.4 to 52.4, stronger than expectations of 50.8 and the fastest pace of expansion in 8 months. However, price pressures in the service sector accelerated after the Oct ISM services prices paid sub-index unexpectedly rose +0.6 to a 3-year high of 70.0, versus expectations of a decline to 68.0.
The markets are discounting a 62% chance that the FOMC will cut the fed funds target range by 25 bp at the next FOMC meeting on December 9-10.
EUR/USD (^EURUSD) recovered from a 3-month low on Wednesday and finished up by +0.08%. Short covering lifted the euro on Wednesday after the dollar gave up early gains and turned lower. Also, Wednesday’s Eurozone economic news that showed the Eurozone Oct S&P composite PMI was revised upward and German factory orders rose by the most in 5 months, were bullish for the euro. The euro initially moved lower on Wednesday due to dollar strength and easing producer price pressures in the Eurozone after the Eurozone Sep PPI fell more than expected, a dovish factor for ECB policy.
Central bank divergence is supportive of the euro, with the ECB seen as largely finished with its rate-cut cycle, while the Fed is expected to cut rates several more times by the end of 2026.
The Eurozone Oct S&P composite PMI was revised upward by +0.3 to 52.5 from the previously reported 52.2, the strongest pace of expansion in nearly 2.5 years.
Eurozone Sep PPI fell -0.1% m/m and -0.2% y/y, slightly weaker than expectations of no change m/m and -0.2% y/y.
German Sep factory orders rose +1.1% m/m, stronger than expectations of +0.9% m/m and the biggest increase in 5 months.
Swaps are pricing in a 4% chance of a -25 bp rate cut by the ECB at the December 18 policy meeting.
USD/JPY (^USDJPY) on Wednesday rose by +0.28%. The yen was under pressure on Wednesday but remained above Tuesday's 8.5-month low against the dollar. The yen retreated on Wednesday’s dovish minutes of the BOJ's September 17-18 policy meeting, which showed that some policymakers expressed caution about raising interest rates. Also, higher T-note yields on Wednesday were negative for the yen.
The yen has recently been weak due to Japanese political uncertainty and a delayed BOJ rate hike. The markets are discounting a 50% chance of a BOJ rate hike at the next policy meeting on December 19.
December COMEX gold (GCZ25) on Wednesday closed up +32.40 (+0.82%), and December COMEX silver (SIZ25) closed up +0.731 (+1.55%).
Precious metals rallied on Wednesday on underlying safe-haven demand amid the ongoing US government shutdown, uncertainty over US tariffs, geopolitical risks, central bank buying, and political pressure on the Fed's independence. Precious metals also found support from Wednesday's minutes of the September 17-18 BOJ meeting, which stated that policymakers cited the need for caution on raising interest rates. Rising inflation expectations are also positive for gold demand as an inflation hedge after the 10-year breakeven inflation rate rose to a 3.5-week high Wednesday at 2.327%.
Signs of stronger demand for industrial metals are bullish for silver prices after the US Oct ISM services index expanded at its fastest pace in 8 months, the Eurozone Oct S&P composite PMI was revised to a nearly 2.5-year high, and German Sep factory orders posted their biggest increase in five months.
Wednesday's rally in the dollar index to a 5.25-month high limited gains in precious metals. Also, Wednesday's stock rebound has curbed some safe-haven demand for precious metals. In addition, higher T-note yields on Wednesday were bearish for precious metals.
Gold prices have carry-over support last Thursday from the World Gold Council's report showing that global central banks purchased 220 MT of gold in Q3, up 28% from Q2.
Since posting record highs in mid-October, long liquidation pressures have weighed on precious metals prices. Holdings in gold and silver ETFs have recently fallen after posting 3-year highs on October 21.
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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