Dollar Rallies and Gold Falls as US Price Pressures Seen Reducing Fed Rate Cuts

Rich Asplund - Barchart - Wed Apr 10, 2:35PM CDT

The dollar index (DXY00) on Wednesday rallied by +1.04% and posted a 4-3/4 month high. The dollar raced higher Wednesday after the US March CPI report came in stronger than expected, boosting T-note yields and dampening the outlook for Fed rate cuts. Wednesday’s slump in stocks also boosted some liquidity demand for the dollar. In addition, war jitters between Iran and Israel boosted safe-haven demand for the dollar after US intelligence said a missile or drone strike by Iran or its proxies against Israeli assets is imminent. Fed swap markets have now priced 50 bp of rate cuts for 2024, less than the 75 bp of rate cuts that were priced last week.

US Mar CPI rose +0.4% m/m and +3.5% y/y, stronger than expectations of +0.3% m/m and +3.4% y/y. Also, Mar CPI ex-food and energy rose +0.4% m/m and +3.8% y/y, stronger than expectations of +0.3% m/m and +3.7% y/y.

The minutes of the March 19-20 FOMC meeting said that almost all officials supported cutting interest rates "at some point this year," although the committee discussed "the possibility of maintaining the current restrictive policy stance for longer should the disinflation process slow." On the Fed's balance sheet, policymakers "generally favored" reducing by "roughly half" the current pace of asset reduction as existing bond holdings mature.

Richmond Fed President Barkin said, "I think we're making a lot of progress on inflation, but we need to be humble about how easy it is to get there," and that Wednesday's figures suggest it may just take some time to get inflation back down.

The markets are discounting the chances for a -25 bp rate cut at 3% for the next FOMC meeting on April 30-May 1 and 19% for the following meeting on June 11-12.

EUR/USD (^EURUSD) on Wednesday dropped to a 1-week low and finished down by -1.05%. Wednesday's surge in the dollar undercut the euro after a stronger-than-expected US Mar CPI report reduced Fed rate cut expectations. Investor caution is also weighing on the euro ahead of the results of Thursday’s ECB meeting, where the ECB is expected to keep the deposit facility rate unchanged at 4.00%.

Swaps are pricing in the chances for a -25 bp rate cut by the ECB at 5% for its next meeting on April 11 and 82% for the following meeting on June 6.

USD/JPY (^USDJPY) Wednesday rose by +0.78%. The yen sank to a 33-year low against the dollar Wednesday after T-note yields spiked sharply higher following the hotter-than-expected US Mar CPI report. The yen was also under pressure based on Wednesday’s comments from BOJ Governor Ueda, who said, "We won't consider changing monetary policy at all to directly respond to moves in foreign exchange.” The yen has underlying support from the possibility that Japanese authorities could intervene in the forex market at any time to support the yen.

Japan's Mar PPI Increased to +0.8% y/y from +0.7% y/y in Feb, right on expectations.

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 0% for the April 26 meeting and 18% for the following meeting on June 14.

June gold (GCM4) on Wednesday closed down -14.0 (-0.59%), and May silver (SIK24) closed up +0.068 (+0.24%). Precious metals Wednesday settled mixed. Metals prices were under pressure from Wednesday’s rally in the dollar index to a 4-3/4 month high. Also, Wednesday’s hotter-than-expected US CPI report reduced expectations for Fed rate cuts this year and weighed on gold prices. In addition, higher global bond yields on Wednesday are bearish for precious metals.

Gold found support Wednesday from the rise in the 10-year breakeven inflation expectations rate to a 5-1/4 month high of 2.424%, boosting the demand for gold as an inflation hedge. Also, Wednesday’s stock selloff has boosted some safe-haven demand for precious metals. In addition, precious metals have safe-haven support from Israel-Iran geopolitical risks after US intelligence said it believes a major missile or drone strikes by Iran or its proxies against military and government targets in Israel are imminent as Iran retaliates against Israel for launching airstrikes on Iranian military officials in Syria.

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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.