Fed Rate Hike Expectations Boost the Dollar
The dollar index (DXY00) rallied to a 1.5-year high on Wednesday and finished up +0.65%. The dollar moved higher Wednesday as Fed rate-hike expectations rose after Tuesday’s US Oct CPI came in hotter than expected, a hawkish factor for Fed policy, and after several Fed members expressed support for tighter policy. Also, Wednesday’s +0.5% increase in WTI crude oil boosted inflation expectations and could persuade the Fed to tighten monetary policy, a bullish factor for the dollar.
US MBA mortgage applications rose +6.2% in the week ended November 6, with the purchase mortgage sub-index up +7.5% and the refinancing mortgage sub-index up +4.5%. The average 30-year fixed-rate mortgage fell -9 bp to 7.21% from 7.30% in the prior week.
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The markets are now pricing in a 100% chance of a +25 bp rate hike at the FOMC’s next meeting on December 8-9.
EUR/USD (^EURUSD) tumbled to a 1.5-year low on Wednesday and finished down by -0.64%. The euro slumped on Wednesday as the dollar rallied. Also, higher crude oil prices on Wednesday were negative for the Eurozone economy and the euro, as Europe imports most of its energy. On the positive side, Italy's September industrial production rose more than expected.
Italy's September industrial production rose +1.2% m/m, stronger than expectations of +0.7% m/m and the largest increase in 10 months.
The markets are now pricing in a 95% chance of a +25 bp rate hike at the ECB’s next policy meeting on December 17.
USD/JPY (^USDJPY) rose by +0.70% on Wednesday. The yen tumbled to a 2.25-month low against the dollar on Wednesday amid dollar strength. Also, higher crude oil prices on Wednesday were negative for Japan’s economy and the yen, as Japan imports more than 90% of its energy.
Japan's Oct machine tool orders rose +42.5% y/y, the sixteenth consecutive month orders have increased.
The market is pricing in a 71% chance of a +25 bp BOJ rate hike at its next meeting on December 18.
December COMEX gold (GCZ26) closed down -29.70 (-0.74%) on Wednesday, and December COMEX silver (SIZ26) closed up +0.777 (+1.52%).
Precious metals settled mixed on Wednesday. Gold prices gave up an early advance on Wednesday and turned lower after the dollar index rallied to a 1.5-year high. Also, Wednesday’s sharp rally in stocks reduced safe-haven demand for precious metals. Wednesday’s +0.5% rally in crude oil prices raised inflation expectations and could persuade global central banks to tighten monetary policy, a bearish factor for precious-metals demand. Silver prices garnered support Wednesday after Italy's September industrial production rose by the most in 10 months, a supportive factor for industrial metals demand.
Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 4.25-year high on October 21, although those holdings have since backed off. Long holdings in silver ETFs rose to a 7.75-month high last Tuesday.
Strong central bank demand for gold is supporting gold prices. Recent World Gold Council data showed cumulative gold purchases by global central banks in Q3 were 321,000 MT, the most since Q4 of 2024. Also, Sunday’s news showed that bullion held in China's PBOC reserves rose by 830,000 ounces to 78.30 million troy ounces in October, the largest increase in three years and the twenty-fourth consecutive month the PBOC boosted its gold reserves.
On the date of publication, Rich Asplund did not directly have a position 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.