Dollar Gains and Gold Falls as Powell Says Fed in No Hurry to Cut Rates

The dollar index (DXY00) Monday rose by +0.45%.  The dollar Monday recovered from overnight losses and rallied moderately on hawkish comments from Fed Governor Bowman that reduced chances for a -50 bp rate cut at the November FOMC meeting when she said core inflation remains "uncomfortably" above the Fed's 2% target.  Also, Monday’s better-than-expected US Chicago PMI and Dallas Fed manufacturing reports supported the dollar.  Gains in the dollar accelerated Monday afternoon based on hawkish comments from Fed Chair Powell, who said the FOMC is in no hurry to cut interest rates.  

The US Sep MNI Chicago PMI unexpectedly rose +0.5 to 46.6, stronger than expectations of -0.1 to 46.0.

The US Sep Dallas Fed manufacturing outlook survey index unexpectedly rose +0.7 to a 20-month high of -9.0, stronger than expectations of a decline to -10.8.

Fed Chair Powell signaled that the Fed is in no hurry to cut interest rates, saying that the overall economy remains on a solid footing and that the Fed will lower interest rates "over time."  He added that the FOMC "is not a committee that feels like it's in a hurry to cut interest rates quickly."

Fed Governor Bowman said core inflation remains "uncomfortably" above the Fed's 2% target, supporting the case for a "measured" approach to lowering interest rates.

The markets are discounting the chances at 100% for a -25 bp rate cut at the November 6-7 FOMC meeting and at 38% for a -50 bp rate cut at that meeting.

EUR/USD (^EURUSD) Monday fell by -0.31%.  The euro Monday gave up overnight gains and turned lower after economic news showed that the German and Italian CPIs eased in September, a dovish factor for ECB policy.  Also, ECB President Lagarde's comments Monday bolstered speculation that the ECB will cut interest rates next month, a negative factor for the euro when she said policymakers are more confident that inflation is being controlled and will reflect that at its October policy meeting.  Losses in the euro accelerated Monday after the dollar strengthened on hawkish comments from Fed Chair Powell.

German Sep CPI (EU harmonized) eased to +1.8% y/y from +2.0% y/y in Aug, right on expectations and the smallest increase in 3-1/2 years.

Italy’s Sep CPI (EU harmonized) eased to +0.8% y/y from +1.2% y/y in Aug, right on expectations and the smallest pace in 4 months.

ECB President Lagarde said ECB policymakers are becoming more optimistic that they will be able to get inflation under control, and “we will take that into account in our next monetary policy meeting in October.” 

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 92% for the October 17 meeting and at 100% for that -25 bp rate cut at the December 12 meeting.

USD/JPY (^USDJPY) Monday rose by +1.17%.  The yen on Monday fell back from a 1-1/2 week high against the dollar and fell sharply as strength in T-note yields sparked long liquidation in the yen.  The yen initially moved higher Monday on positive carryover from last Friday after former defense minister Shigeru Ishiba, who is seen as supportive of the BOJ's plan to hike rates gradually, unexpectedly won the election for leader of the Liberal Democratic Party, defeating Sanae Takaichi, who had opposed interest rate hikes.  According to news sources from NHK, incoming Prime Minister Ishiba plans to dissolve Japan’s lower house of parliament on October 9 and hold a general election on October 27. 

Swaps are pricing in the chances for a +10 bp rate hike by the BOJ at 5% for the October 30-31 meeting and at +23% for that +10 bp rate hike at the December 18-19 meeting.

December gold (GCZ24) Monday closed down -8.70 (-0.33%), and December silver (SIZ24) closed down -0.358 (-1.13%).  Precious metals on Monday settled moderately lower.  Hawkish comments Monday from Fed Governor Bowman pushed T-note yields and the dollar higher, which weighed on precious metals when she said core inflation remains "uncomfortably" above the Fed's 2% target.  Silver prices were also under pressure Monday after the US Sep MMI Chicago PMI contracted for the eleventh consecutive month, a bearish factor for industrial metals demand.   Losses in precious metals accelerated in post-market trading Monday afternoon when Fed Powell said the FOMC is in no hurry to cut interest rates.

Losses in precious metals were contained Monday by dovish comments from ECB President Lagarde that bolstered speculation that the ECB will cut interest rates next month when she said policymakers are more confident that inflation is being controlled and will reflect that at its October policy meeting.  Also, Monday’s German and Italian CPIs fell below the ECB’s 2% target, which may prompt the ECB to cut interest rates further, a positive factor for gold.  In addition, fund buying of gold supported gold prices as long gold positions in ETFs rose to a 7-1/2 month high last Friday. 

More Precious Metal News from Barchart

• Stocks Hang Onto Healthy September Gains as Powell Speaks on Rates
• Dollar Recovers Early Losses on Hawkish Fed Governor Comments
• Dollar Weakens on Dovish US Economic Reports
• Dollar Falls on Weaker-Than-Expected US Economic Reports

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.