Dollar Falls and Gold Rallies on Dovish US Economic Reports

Rich Asplund - Barchart - Wed May 15, 3:01PM CDT

The dollar index (DXY00) on Wednesday fell by -0.64% and posted a 5-week low. Wednesday’s US economic reports were dovish for the Fed and weighed on the dollar. Also, Wednesday’s rally in the S&P 500 to a record high curbed liquidity demand for the dollar.

US Apr CPI eased to +3.4% y/y from +3.5% y/y in March, right on expectations. Apr CPI ex-food and energy eased to +3.6% y/y from +3.8% y/y in March, right on expectations and the smallest increase in 3 years.

US Apr retail sales were unchanged m/m, weaker than expectations of +0.4% m/m. However, Apr retail sales ex-autos rose +0.2% m/m, right on expectations.

The US May Empire manufacturing survey general business conditions index unexpectedly fell -1.3 to -15.6, weaker than expectations of an increase to -10.0.

The US May NAHB housing market index fell -6 to a 4-month low of 45, weaker than expectations of 50.

Hawkish comments Tuesday evening from Kansas City Fed President Schmid were supportive of the dollar when he said interest rates could remain high "for some time" as policymakers await evidence that price pressures are easing.

Hawkish comments Wednesday from Minneapolis Fed President Kashkari were dollar positive when he said it is "unknown" how much downward pressure monetary policy is putting on the economy so the Fed will likely need to keep interest rates at current levels for "a while longer until we figure out where underlying inflation is headed before we jump to any conclusions."

The markets are discounting the chances for a -25 bp rate cut at 10% for the June 11-12 FOMC meeting and 38% for the following meeting on July 30-31.

EUR/USD (^EURUSD)on Wednesday rallied to a 5-week high and finished up by +0.57%. Wednesday’s slump in the dollar boosted the euro. The euro also found support on Wednesday’s stronger-than-expected Eurozone industrial production report. On the bearish side for the euro were dovish comments Wednesday from ECB Governing Council member Villeroy de Galhau, who said Eurozone inflation data for April give the ECB confidence to begin cutting interest rates in June.

Eurozone Mar industrial production rose +0.6% m/m, stronger than expectations of +0.4% m/m.

The European Commission forecasted Eurozone 2024 GDP growth at +0.8%, unchanged from a February estimate, and lowered its Eurozone 2024 inflation forecast to 2.5% from February’s 2.7% forecast.

ECB Governing Council member Villeroy de Galhau said Eurozone inflation data for April give the ECB confidence to begin cutting interest rates in June before continuing to loosen monetary policy at a pragmatic pace.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 98% for its next meeting on June 6.

USD/JPY (^USDJPY) on Wednesday fell by -0.96%. The yen gained against the dollar Wednesday on weakness in T-note yields. The yen also has carryover support from Monday when the BOJ cut the amount of its monthly bond purchases, which pushed the 10-year JGB bond yield up to an 11-year high and boosted speculation the BOJ will continue to tighten monetary policy.

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 25% for the June 14 meeting.

June gold (GCM4) Wednesday closed up +35.0 (+1.48%), and July silver (SIN24) closed up +1.027 (+3.58%). Precious metals prices rallied Wednesday, with gold climbing to a 3-week high and silver climbing to a 5-week high. Wednesday’s slump in the dollar index to a 5-week low supported metals prices. Also, falling global bond yields on Wednesday are bullish for precious metals. In addition, metals prices gained on Wednesday’s dovish US economic reports that bolster the prospects for the Fed to cut interest rates this year. Silver has carryover support from Wednesday’s rally in copper prices to an all-time high.

On the bearish side was Wednesday’s rally in the S&P 500 to an all-time high, which curbed safe-haven demand for precious metals. Also, a decline in inflation expectations reduced demand for gold as an inflation hedge after the 10-year breakeven inflation rate fell to a 3-1/2 week low of 2.308%.

More Precious Metal News from Barchart

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.