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Euro FX(E6M23)

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Dollar Rallies on U.S. Economic Strength and Euro Weakness

Barchart - Thu Sep 14, 3:33PM CDT

The dollar index (DXY00) Thursday rose by +0.59% and posted a 6-month high.  The dollar on Thursday moved higher on better-than-expected U.S. economic reports. Also, weakness in EUR/USD benefited the dollar after the ECB Thursday signaled it would pause its rate hike cycle, which knocked the euro down to a 5-3/4 month low against the dollar.

U.S. weekly initial unemployment claims rose +3,000 to 220,000, showing a stronger labor market than expectations of 225,000.

U.S. Aug PPI final demand accelerated to +1.6% y/y from +0.8% y/y in July, the highest in 4 months and stronger than expectations of +1.3% y/y.  However, Aug PPI ex-food and energy eased to _2.2% y/y from +2.4% y/y in July, right on expectations and the slowest pace of increase in 2-1/2 years.

U.S. Aug retail sales rose +0.6% m/m, stronger than expectations of +0.1% m/m.  Aug retail sales ex-autos rose +0.6% m/m, stronger than expectations of +0.4% m/m.

EUR/USD (^EURUSD) Thursday fell by -0.84% and dropped to a 5-3/4 month low.  The euro tumbled Thursday after the ECB signaled it would pause its rate hike cycle. Also, Thursday’s action by the ECB to cut its 2024 Eurozone GDP forecast undercut the euro.  In addition, comments from ECB President Lagarde weighed on the euro when she said the Eurozone is in a period of" slow and sluggish growth."

The ECB raised its main refinancing rate by +25 bp to 4.50% from 4.25% and said the new level of constriction would make a "substantial contribution" to bringing inflation under control. 

The ECB signaled its intent to stay on hold for now, saying, "Based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to target. 

The ECB cut its Eurozone 2023 GDP forecast to 0.7% from a prior forecast of 0.9% and raised its 2023 inflation forecast to +5.6% from a prior forecast of +5.4%. 

ECB President Lagarde said the Eurozone is in a period of" slow and sluggish growth" and that inflation is still seen as too high for too long. 

USD/JPY (^USDJPY) Thursday was unchanged.  The yen on Thursday traded on both sides of unchanged.  Weakness in the euro boosted the yen, as did higher Japanese bond yields.  However, the yen shed its gains due to higher T-note yields. 

Thursday’s Japanese economic news was mixed for the yen.  On the positive side, Japan Jul industrial production was revised upward by +0.2 to -1.8% m/m from the initially reported -2.0% m/m. Conversely, Jul core machine orders fell -1.1% m/m and -13.0% y/y, weaker than expectations of -0.8% m/m and -10.3% y/y, with the -13.0% drop, the biggest year-on-year decline in almost three years.

October gold (GCV3) Thursday closed unchanged, and December silver (SIZ23) closed -0.187 (-0.81%). Precious metals prices on Thursday closed mostly lower, with gold posting a 3-week low and silver posting a 1-month low. Thursday’s rally in the dollar index to a 6-month high was bearish for metals.  Also, higher T-note yields Thursday undercut precious metals.  In addition, the continued liquidation of gold holdings by funds is bearish for gold after long gold holdings in ETFs fell to a 3-1/3 year low Wednesday.  Finally, silver prices came under pressure today after the ECB cut its 2023 Eurozone GDP forecast, a sign of reduced demand for industrial metals.

Losses in gold are limited after China boosted stimulus when the PBOC today cut the reserve requirement ratio for banks by 25 bp.  Also, the signal from the ECB today that it will pause its rate-hike cycle is bullish for metals.  In addition, today’s stronger-than-expected U.S. Apr PPI final demand boosted demand for gold as an inflation hedge. 

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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.

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