Dollar Tumbles and Gold Rallies on a Dovish US CPI Report

The dollar index (DXY00) today is down by -0.69%.  The dollar retreated today after the US May CPI rose less than expected, boosting expectations for Fed easing later this year.  Also, today’s rally in the S&P 500 to a new record high has reduced liquidity demand for the dollar.

US May CPI unexpectedly eased to +3.3% y/y from +3.4% y/y in Apr versus expectations of no change at +3.4% y/y.  May CPI ex-food and energy eased to a 3-year low of +3.4% y/y, weaker than expectations of +3.5% y/y.

The markets are discounting the chances for a -25 bp rate cut at 1% for today’s FOMC meeting, 14% for the next meeting on July 30-31, and 69% for the following meeting on Sep 17-18.

EUR/USD (^EURUSD) is up by +0.88%.  The euro rallied today after the dollar tumbled on the weaker-than-expected US May CPI report.  The euro also garnered support from hawkish comments today from ECB Executive Board member Schnabel, who said the economy is recovering gradually, and from ECB Governing Council member Patsalides, who said, "further actions of the ECB on interest rates will depend on the data we will have."

ECB Executive Board member Schnabel said the Eurozone economy is recovering gradually, but the "last mile" of disinflation is proving bumpy.

ECB Governing Council member Patsalides said, "Further actions of the ECB on interest rates will depend on the data we will have," and there is no specific direction to which the central bank is committed, and it retains its options.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 10% for the July 18 meeting and 59% for the September 12 meeting.

USD/JPY (^USDJPY) today is down by -0.78%.  The yen jumped against the dollar today after Japan's May PPI rose more than expected, a hawkish factor for BOJ policy.  The yen added to its gains when T-note yields tumbled on today’s weaker-than-expected US May CPI report.

Japan's May PPI rose +2.4% y/y, stronger than expectations of +2.0% y/y and the largest increase in 9 months.

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 5% for the June 14 meeting and at 70% for the July 31 meeting.

August gold (GCQ4) today is up +14.3 (+0.61%), and July silver (SIN24) is up +0.664 (+2.27%).  Precious metals today are posting moderate gains on a weak dollar.  Also, today’s weaker-than-expected US May CPI report knocked T-note yields lower and bolstered the case for the Fed to cut interest rates, a bullish factor for precious metals.  In addition, the collapse of ceasefire talks in Gaza today signals that the war will continue, which has boosted the safe-haven demand for precious metals. 

On the bearish side for precious metals is today’s rally in the S&P 500 to a new all-time high, which reduces safe-haven demand for precious metals.  Also, today’s Japan May PPI report rose more than expected, which is a hawkish factor for BOJ policy.

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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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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