The Dollar Dips Post-Fed Rate Cut: What Lies Ahead for Currency Markets
Mixed Economic Signals Affect Dollar Performance
The dollar index (DXY00) fell by -0.71% on Thursday. This decline follows the recent peak on Wednesday, which marked a 4-month high. The Federal Open Market Committee (FOMC) cut the federal funds target range by -25 basis points, contributing to the dollar’s reduction in value. Additionally, lower Treasury note yields have diminished the dollar’s interest rate advantages. Economic indicators from the U.S. added to this bearish sentiment, revealing that Q1 nonfarm productivity increased less than anticipated while unit labor costs rose more than expected.
Labor Market Shows Signs of Resilience
In a positive twist, U.S. weekly initial unemployment claims increased by +3,000 to 221,000, which is still better than the expected 222,000. This indicates a stronger labor market, a factor that could be seen as hawkish for Federal Reserve policy. Furthermore, comments from Fed Chair Powell supported the dollar, as he referenced that core inflation remains “somewhat elevated.”
Productivity and Labor Costs in Focus
U.S. Q1 nonfarm productivity rose by +2.2%, falling short of the +2.5% expectation. Conversely, Q1 unit labor costs increased by +1.9%, surpassing the +1.0% forecast. The FOMC has officially reduced the fed funds target range to 4.50%-4.75%, from the previous 4.75%-5.00%. Powell reiterated that while inflation is closer to the target, core inflation remains elevated and emphasized the uncertainty surrounding future economic policy changes. Currently, markets estimate a 67% chance for another -25 basis point rate cut at the upcoming December 17-18 FOMC meeting.
Euro Gains Some Ground, Despite Mixed Data
The EUR/USD (^EURUSD) appreciated by +0.71%, supported by the dollar’s weakness. Traders engaged in short-covering following Wednesday’s drop, which saw the euro hit a 4-1/4 month low. Strength for the euro also stemmed from positive reports on Eurozone retail sales and trade data from Germany. However, German industrial production for September decreased more than anticipated.
Eurozone retail sales rose +0.5% month-over-month in September, exceeding expectations of +0.4%. Additionally, August’s figures were revised upward from +0.2% to +1.1%. Meanwhile, German export data showed a decline of -1.7% month-over-month, better than the projected -2.4%. However, imports rose by +2.1% month-over-month, also outperforming the expected +0.6% growth. Notably, German industrial production fell -2.5% month-over-month, which was worse than the -1.0% forecast.
ECB Governing Council member Knot expressed optimism regarding the Eurozone economy, highlighting a moderation in inflation and decreasing borrowing costs.
Rate Cut Predictions Signal Potential ECB Action
Swaps markets currently predict a 100% chance of a -25 basis point rate cut by the ECB at the December 12 meeting, with a 17% likelihood of a more aggressive -50 basis point cut.
Yen Reacts to Currency Official’s Warnings
The USD/JPY (^USDJPY) dropped by -1.20% on Thursday. This downward movement was fueled by short-covering, following remarks from Japan’s chief currency official, who warned of potential government interventions to counter excessive forex fluctuations. After falling to a 3-1/4 month low against the dollar, the yen found some support in the day’s lower Treasury yields. Unfortunately, news of Japanese wages rising less than expected presented a dovish sign for Bank of Japan (BOJ) policies, exerting further pressure on the yen.
In September, Japan’s labor cash earnings rose by +2.8% year-over-year, slightly under the +3.0% forecasts. Additionally, real cash earnings unexpectedly fell by -0.1% year-over-year, against the anticipated +0.1% growth.
Mimura, Japan’s currency chief, noted they are observing one-sided, abrupt movements in the currency market and will act appropriately if excessive volatility continues.
Precious Metals Watch: Gold and Silver Prices Climb
December gold (GCZ24) finished the day up +29.50 (+1.10%), while December silver (SIZ24) rose by +0.524 (+1.67%). Precious metals saw a modest recovery from Wednesday’s sharp losses, aided by the weaker dollar. The recent -25 basis point rate cuts by the Bank of England and the Fed propelled prices upward amid sustained demand for safety due to ongoing tensions in the Middle East. Silver specifically benefited from positive economic news indicating that China’s October exports rose the most in over two years, spotlighting growth potential and increased industrial demand.
Market Trends and Future Projections
The S&P 500’s rally to a new record high lessened the appeal for precious metals. Hawkish remarks from Powell regarding core inflation also raised concerns for gold prices. Additionally, speculation around President-elect Trump’s high tariff policies looming over global trade could dampen demand for industrial metals like silver.
More Precious Metal News from Barchart
On the date of publication, Rich Asplund did not hold positions in any of the securities mentioned in this article. All information and data in this article are provided for informational purposes only. For additional information, please view the Barchart Disclosure Policy here.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
