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Australian Dollar(A6M23)

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Dollar Slips on Prospects for Weaker U.S. Economic Growth

Barchart - Tue Sep 19, 2:20PM CDT

The dollar index (DXY00) on Tuesday fell -0.06% despite expectations for a hawkish FOMC meeting this week and Tuesday’s +5.4 bp rise in the 10-year T-note yield.  The forex market Tuesday seemed to focus more on the negative economic outlook for the U.S. with rising gasoline prices, Tuesday’s weak U.S. housing starts report, the restart of student loan payments on October 1, the possible expansion of the UAW strike, and a possible U.S. government shutdown on September 30.

The markets are fully expecting the FOMC at its 2-day meeting that ends on Wednesday to leave its funds rate target unchanged at 5.25/5.50%.  However, the markets are expecting the FOMC to maintain its hawkish bias and keep in play the possibility of one more rate hike later this year.

Specifically, the markets are discounting a 29% chance that the FOMC will raise the funds rate by +25 bp at the next FOMC meeting that ends on November 1, and a 15% chance for that 25 bp rate hike at the following meeting that ends on December 13.  The markets are then expecting the FOMC to begin cutting rates in 2024 in response to an expected slowdown in the U.S. economy.

The OECD Tuesday cut its global GDP forecast for 2024 to +2.7% from +3.0%, with the comment that “While high inflation continues to unwind, the world economy remains in a difficult place. We’re confronting the double challenges of inflation and low growth.”

U.S. Aug housing starts fell -11.3% to 1.283 million, much weaker than expectations for a decline of about -1%.  However, Aug building permits rose +6.9% m/m to 1.542 million, stronger than expectations for a small decline.

The Eurozone final-Aug CPI was revised slightly lower to +0.5% m/m and +5.2% y/y from the preliminary report of +0.6% m/m and +5.3% y/y.  The final-core CPI was left unrevised at +5.3% y/y.

EUR/USD (^EURUSD) on Tuesday fell -0.13%, while USD/JPY (^USDJPY) rose +0.16%.  The euro was slightly undercut by Tuesday’s small downward revision in the Eurozone CPI, which was dovish for ECB policy.  The Japanese markets are looking forward to the Bank of Japan’s policy meeting on Friday.

October gold (GCV3) on Tuesday closed +0.10 (+0.01%), and Dec silver (SIZ23) closed down -0.042 (-0.18%).  Precious metals prices were undercut by Tuesday’s rise in the 10-year T-note yield, but had support from the slightly lower dollar and safe-haven demand sparked by weak stocks. Silver was undercut by Tuesday’s weak U.S. housing starts report.  Gold continues to be pressured by long liquidation pressures after long gold holdings in ETFs fell to a 3-1/2 year low on Monday.

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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.