The dollar index (DXY00) on Tuesday extended Monday’s gains and rose by +0.48% to a 1.5-week high. The dollar rallied on Tuesday following hawkish comments from the Fed. Kansas City Fed President Jeff Schmid said the Fed needs to continue pressing against inflation that has remained stubbornly high, and Minneapolis Fed President Nel Kashkari said any drastic cuts to interest rates would risk stoking inflation. Also, political uncertainty in France and Japan is undercutting the euro and yen to the benefit of the dollar.
The ongoing shutdown of the US government is bearish for the dollar as the shutdown entered its second week on Monday. The longer the shutdown is maintained, the more likely the US economy will suffer, and GDP growth will stagnate, a negative factor for the dollar.
US Aug consumer credit rose by +$0.363 million, weaker than expectations of +$14.000 billion and the smallest increase in six months.
Monday evening, Kansas City Fed President Jeff Schmid said, “With inflation still too high, monetary policy should lean against demand growth to allow the space for supply to grow and relieve price pressures in the economy.”
Minneapolis Fed President Neel Kashkari said, “Some of the data we’re looking at is sending some stagflationary signals,” and that any drastic cuts to interest rates would risk stoking inflation.
The markets are pricing in a 93% chance of a -25 bp rate cut at the next FOMC meeting on Oct 28-29.
EUR/USD (^EURUSD) on Tuesday fell by -0.50% and posted a 1.5-week low. The euro slid on Tuesday on signs of weakness in the Eurozone economy, following the unexpected decline in German August factory orders. Also, political turmoil in France is weighing on the euro after French Prime Minister Lecornu resigned following President Macron’s naming of a new cabinet, raising uncertainty about the Eurozone’s second-largest economy.
German Aug factory orders unexpectedly fell -0.8% m/m, weaker than expectations of +1.2% m/m.
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) on Tuesday rose by +1.00%. The yen extended Monday’s selloff on Tuesday to a 7.5-month low against the dollar. The yen is retreating on concern that the election of Sanae Takaichi as the leader of Japan’s ruling Liberal Democratic Party, which makes her the likely new Japanese Prime Minister, will result in a slower timeline for the BOJ’s policy tightening. Takaichi’s surprise victory has tempered expectations that the BOJ may raise interest rates as soon as this month, while raising concerns about an increased debt supply due to her support for expanded financial stimulus.
The Japan Aug leading index CI rose +1.3 to a 5-month high of 107.4, stronger than expectations of 107.1.
December gold (GCZ25) on Tuesday closed up +28.10 (+0.71%), and December silver (SIZ25) closed down -0.933 (-1.93%). Precious metal prices settled mixed on Tuesday, with Dec gold posting a new contract high and nearest-futures (V25) gold posting an all-time high of $3,981.50 a troy ounce.
Precious metals garnered support on Tuesday as the US government remains closed, boosting safe-haven demand for these metals. Also, political turmoil in France is boosting safe-haven demand for precious metals after French Prime Minister Lecornu resigned when President Macron named a new cabinet. In addition, demand for precious metals as a store of value is supporting prices after Sanae Takaichi, a proponent of easy fiscal and monetary policy, won Saturday’s election to become the leader of the ruling LDP party and is likely to become the new Japanese Prime Minister. Central bank buying if gold is underpinning gold prices after the People’s Bank of China (PBOC) added +0.04 million troy ounces of gold to its reserves in September, the 11th consecutive month the PBOC has boosted its gold reserves.
Tuesday’s rally in the dollar index to a 1.5-week high is negative for precious metals. Also, hawkish Fed comments were bearish for precious metals. Kansas City Fed President Jeff Schmid said the Fed needs to keep pressing against inflation that has remained stubbornly high, and Minneapolis Fed President Nel Kashkari said any drastic cuts to interest rates would risk stoking inflation. Silver prices were under pressure on Tuesday due to signs of weakness in global industrial metals demand, following the unexpected decline in German factory orders for August.
Precious metals continue to receive safe-haven support due to uncertainty tied to US tariffs, geopolitical risks, and global trade tensions. Also, President Trump’s attacks on Fed independence are boosting demand for gold, as he attempts to fire Fed Governor Cook. Additionally, Stephen Miran’s intention to be a Fed Governor while still technically holding his White House job on the Council of Economic Advisors contributes to this uncertainty.
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. The swaps market shows a 93% chance the Fed will cut the federal funds target range by 25 bp at the October 28-29 FOMC meeting.
Precious metals prices continue to receive support from fund buying of precious metal ETFs. Gold holdings in ETFs rose to a 3-year high on Monday, and silver holdings in ETFs rose to a 3-year high last Wednesday.
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
