Dollar Edges Lower as the Euro Climbs on Hawkish ECB Rate Cut

The dollar index (DXY00) Thursday retreated from a 1-week high and finished down by -0.33%.  The dollar slid Thursday after US weekly jobless claims unexpectedly increased, which signaled a weaker labor market that is dovish for Fed policy.  Also, strength in the euro weighed on the dollar as the euro moved higher after the ECB delivered a hawkish rate cut when it refrained from pre-committing to future interest rate cuts after cutting rates Thursday.

On the positive side for the dollar, Thursday’s as-expected US Aug PPI report dampened speculation that the Fed will cut interest rates by 50 bp at next week’s FOMC meeting.

US weekly initial unemployment claims unexpectedly rose +2,000 to 230,000, showing a slightly weaker labor market than expectations of a decline to 226,000.

US Aug PPI final demand eased to +1.7% y/y from +2.1% y/y in July, right on expectations and the smallest increase in 6 months.  Aug PPI ex-food and energy rose +2.4 % y/y, up from +2.3% y/y in July and right on expectations.

The markets are discounting the chances at 100% for a -25 bp rate cut at the Sep 17-18 FOMC meeting and at 29% for a -50 bp rate cut at that meeting.

EUR/USD (^EURUSD) Thursday rose by +0.47%.  The euro garnered support Thursday after the ECB delivered a hawkish rate cut when it cut its deposit facility rate by -25 bp as expected but refrained from committing to further rate cuts.  Gains in the euro were limited after the ECB cut its 2024 Eurozone GDP forecast and after ECB President Lagarde said Eurozone growth risks are tilted to the downside.

As expected, the ECB cut its deposit facility rate by -25 bp to 3.50% from 3.75% and said it would continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of interest rates. 

The ECB cut its Eurozone 2024 GDP forecast to +0.8% from a previous forecast of +0.9% and raised its 2024 core inflation forecast to +2.9% from +2.8%. 

ECB President Lagarde said Eurozone growth risks are tilted to the downside and, "according to survey indicators, the recovery in the Eurozone is continuing to face some headwinds."

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 56% for the October 17 meeting.

USD/JPY (^USDJPY) Thursday fell by -0.25%.  The yen moved higher against the dollar Thursday due to hawkish comments from BOJ Board member Tamura, who said he sees the need for the BOJ to keep raising interest rates.  Gains in the yen were limited by Thursday’s weaker-than-expected Japan Aug PPI report, a dovish factor for BOJ policy.  Also, Thursday’s +3% rally in the Nikkei Stock Index curbed safe-haven demand for the yen.  In addition, higher T-note yields Thursday were bearish for the yen. 

BOJ Board member Tamura said, "I believe that we need to raise the short-term rate to at least around 1% in the second half of the bank's projection period through fiscal 2026 to contain upside price risks and for achieving the stable and sustainable inflation target."

The Japan Q3 BSI large manufacturer business confidence index rose +5.5 q/q to 4.5.

Japan Aug PPI fell -0.2% m/m and rose +2.5% y/y, weaker than expectations of unchanged m/m and +2.8% y/y.

Swaps are pricing in the chances for a +10 bp rate hike by the BOJ at 0% for the September 20 meeting and at +12% for the October 30-31 meeting.

December gold (GCZ24) Thursday closed up +38.20 (+1.50%), and December silver (SIZ24) closed up +1.179 (+4.08%).  Precious metals Thursday rallied sharply, with Dec gold posting a contract high and nearest futures (U24) posting a record high of $2,555.00 an ounce.  Also, silver surged to a 2-week high.  Thursday’s weaker dollar was supportive of metals.  Also, Thursday’s action by the ECB to cut interest rates is bullish for precious metals.  In addition, Thursday’s unexpected increase in US weekly jobless claims signaled weakness in the labor market, which is dovish for Fed policy and bullish for gold. Finally, fund buying of gold supported gold prices as long gold positions in ETFs rose to a 6-3/4 month high Wednesday. 

Higher global bond yields on Thursday are negative for precious metals.  Also, hawkish comments Thursday from BOJ Board member Tamura were bearish for gold when he said he sees the need for the BOJ to keep raising interest rates.  A bearish factor for silver was Thursday’s action by the ECB to cut its 2024 Eurozone GDP forecast, a negative for industrial metals demand.   

More Forex News from Barchart

• Dollar Slips and Gold Climbs to a Record High as ECB Cuts Interest Rates
• Dollar Sees Support From Reduced Chance of 50 bp Fed Rate Cut Next Week
• Dollar Rebounds With T-Note Yields on Sticky US Core CPI
• Dollar Slightly Higher on Reduced Speculation About a -50 bp Rate Cut

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.