Dollar Slides and Gold Jumps as Powell Downplays a Fed Rate Hike

Rich Asplund - Barchart - Wed May 1, 2:32PM CDT

The dollar index (DXY00) Wednesday retreated from a 2-week high and fell by -0.35%. The dollar today gave up early gains and turned lower as bond yields dipped from weaker-than-expected US economic news on Mar JOLTS job openings and the Apr ISM manufacturing index. Losses in the dollar accelerated after Fed Chair Powell said it was “unlikely” that the Fed's next policy move would be to raise interest rates.

Weekly US MBA mortgage applications fell -2.3% in the week ended April 26. The purchase mortgage sub-index fell -1.7% and the refinancing sub-index fell -3.3%. The average 30-year fixed rate mortgage rose +0.05 bp to 7.29% from 7.24% in the prior week.

The US Apr ADP employment change rose +192,000, stronger than expectations of +183,000. Also, Mar was revised upward to +208,000 from the previously reported +184,000.

The US Mar JOLTS job openings fell -325,000 to a 3-year low of 8.488 million, showing a weaker labor market than expectations of 8.680 million.

The US Apr ISM manufacturing index fell -1.1 to 49.2, weaker than expectations of 50.0. The Apr ISM prices paid sub-index unexpectedly rose +5.1 to a 1-3/4 year high of 60.9 versus expectations of a decline to 55.4.

US Mar construction spending unexpectedly fell -0.2% m/m, weaker than expectations of an +0.3% m/m increase.

The FOMC, as expected, kept the fed funds target range unchanged at 5.25%-5.50% and said, "In recent months, there has been a lack of further progress toward the FOMC's 2% inflation objective."

The FOMC said it will slow the pace of its balance sheet runoff, or quantitative tightening, saying it will cut the cap on runoff for Treasuries in its portfolio to $25 billion a month from $60 billion beginning in June. The FOMC also said its cap for mortgage-backed securities (MBS) will remain unchanged at $35 billion a month and it will begin to invest any principal payments above the cap into Treasuries instead of MBS starting in June.

Fed Chair Powell said, "It will probably take longer than previously expected" for the Fed to gain enough confidence about the inflation trajectory to start cutting interest rates. He added that "it's unlikely that the next policy rate move will be a hike" in interest rates.

The markets are discounting the chances for a -25 bp rate cut at 15% for the June 11-12 FOMC meeting and 35% for the following meeting on July 30-31.

EUR/USD (^EURUSD) Wednesday rose by +0.29%. The euro on Wednesday recovered from a 1-week low and rallied moderately. A pullback in the dollar on Wednesday sparked short covering in the euro. Trading activity in the euro was limited on Wednesday, with most of Europe closed for the May Day holiday.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 85% for its next meeting on June 6.

USD/JPY (^USDJPY) Wednesday fell by -0.22%. A decline in T-note yields Wednesday supported the yen. The yen also has support on concern that any additional yen weakness could spark intervention in the currency market by Japanese authorities. The yen recovered sharply from a 34-year low against the dollar on Monday after Japan intervened in the forex market to stem the yen’s slide.

The Japan Apr Jibun Bank manufacturing PMI was revised downward by -0.3 to 49.6 from the previously reported 49.9.

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 19% for the June 14 meeting.

June gold (GCM4) Wednesday closed up +8.1 (+0.35%), and July silver (SIN24) closed up +0.094 (+0.35%). Precious metals Wednesday posted moderate gains. A weaker dollar Wednesday was bullish for metals. Also, some mild short covering on Wednesday boosted precious metals prices after Tuesday’s plunge. Demand for gold as an inflation hedge increased Wednesday after the US Apr ISM prices paid sub-index unexpectedly rose to a 1-3/4 year high. Gold prices jumped more than $20 an ounce in after-hours trading Wednesday afternoon when Fed Chair Powell said it’s “unlikely” the next move by the Fed will be a rate hike.

Gains in precious metals were limited by fund liquidation in gold after long gold holdings in ETFs fell to a 4-1/2 year low on Tuesday. A negative factor for silver prices was Wednesday’s weaker-than-expected US economic reports on Mar construction spending and the Apr ISM manufacturing index, bearish factors for industrial metals demand.

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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.