Dollar Pressured by Weaker-Than-Expected US CPI Report

The dollar index (DXY00) on Friday ended the day little changed. The dollar was undercut by Friday’s slightly-weaker-than-expected US CPI report, which gave the Fed a bit more latitude to cut interest rates.  The dollar was also undercut by Friday’s -0.6 bp decline in the US 10-year T-note yield, which hurts the dollar’s interest rate differentials.

The Sep US CPI report of +0.3% m/m and +3.0% y/y was slightly weaker than market expectations of +0.4% m/m and +3.1% y/y.  Also, the Sep core CPI report of +0.2% m/m and +3.0% y/y was slightly weaker than market expectations of +0.3% m/m and +3.1% y/y.  Although the US CPI report was slightly weaker than expected, the Sep CPI report of +3.0% y/y rose to match the current 16-month high, and the core CPI report of +3.0% y/y was still far above the Fed’s inflation target of +2.0%.

Also on the bearish side for the dollar, the final-Aug University of Michigan US consumer sentiment index fell -1.4 points to 53.6, which was weaker than market expectations of a -0.5 point drop to 54.5.

On the bullish side for the dollar, Friday’s Oct S&P US manufacturing PMI report rose +0.2 to 52.2, stronger than expectations of unchanged at 52.0.  Also, the Oct S&P US services PMI report rose +1.0 to 55.2, stronger than expectations for a -0.7 point decline to 53.5.

The dollar continues to be undercut by the ongoing US government shutdown.  The longer the shutdown is maintained, the more likely the US economy will suffer and the more likely the Fed will have to cut interest rates.

The markets are pricing in a 97% chance of a -25 bp rate cut at the next FOMC meeting on Oct 28-29.

EUR/USD (^EURUSD) on Friday rose by +0.09%, seeing support from general dollar weakness.

The euro also saw support from Friday’s news that the preliminary-Oct HCOB Eurozone manufacturing PMI rose by +0.2 points to 50.0, which was stronger than expectations for an unchanged report at 49.8.  Also, the preliminary-Oct HCOB Eurozone services PMI rose by +1.3 points to 52.6, which was stronger than market expectations for a -0.1 point drop to 51.2.

Swaps are pricing in a 1% chance of a -25 bp rate cut by the ECB at the October 30 policy meeting.

USD/JPY (^USDJPY) rose by +0.16%, seeing support from general dollar weakness.

December COMEX gold (GCZ25) on Friday closed down -7.80 (-0.19%), and December COMEX silver (SIZ25) closed down -0.118 (-0.24%).  Gold prices fell due to negative technical sentiment tied to the heavy long liquidation pressure seen earlier this week.  Gold traded lower despite Friday’s dovish US CPI report, which was supportive of gold.   Silver prices saw some support from Friday’s stronger-than-expected US PMI report, which was supportive for industrial metals demand.

Precious metals continue to receive safe-haven support due to the ongoing US government shutdown, uncertainty over US tariffs, geopolitical risks, central bank buying, US-China trade tensions, and President Trump’s pressure on the Fed’s independence. In addition, recent weaker-than-expected US economic news has bolstered the outlook for the Fed to keep cutting interest rates, a bullish factor for precious metals.

Precious metals prices have seen support from fund buying of precious metal ETFs.  Before falling back later this week, gold holdings in ETFs rose to a 3-year high on Tuesday, and silver holdings in ETFs rose to a 3.25-year high on the same day.

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. This article was originally published on Barchart.com