Dollar Pressured by Economic Data and Fed Comments; Euro and Yen Influence Market Dynamics
The dollar index (DXY00) experienced a slight dip on Tuesday, falling by -0.10%. This decrease followed a rise to a 2-1/2 week high earlier, resulting in modest losses for the dollar. Reports indicated that the upcoming US reciprocal tariffs scheduled to take effect on April 2 would be more targeted rather than widespread, alleviating inflation concerns. This development could enable the Federal Reserve to continue interest rate cuts. Additionally, US economic data revealed that consumer confidence fell to a 4-year low in March and February’s new home sales were lower than anticipated. However, hawkish statements from Fed Governor Kugler, who expressed support for maintaining interest rates steady for “some time,” helped limit the dollar’s losses.
In January, the S&P CoreLogic Case-Shiller composite-20 home price index increased by +4.67% year-on-year, falling short of the expected +4.80% but marking the fastest pace of growth in five months.
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February new home sales in the US rose by +1.8% month-on-month to a total of 676,000, which was lower than predictions of 680,000. Meanwhile, the Conference Board’s March consumer confidence index posted a significant drop of -7.2 points, landing at 92.9, below the expected 94.0. The Richmond Fed’s March manufacturing survey also revealed a decline, falling -10 to -4 against expectations of 1.
Kugler emphasized the importance of monitoring the acceleration of price increases and heightened inflation expectations, especially in light of recent inflation trends. She reiterated her support for maintaining interest rates for an extended period.
Upcoming Economic Reports to Watch
This week, market participants will look closely at several key reports. On Wednesday, the February capital goods new orders (excluding defense and aircraft) are anticipated to increase by +0.2% month-over-month. On Thursday, the fourth-quarter GDP is projected to remain unchanged at +2.3% annualized quarter-on-quarter, while March pending home sales are expected to rise by +1.0% month-over-month. Friday will bring reports on February personal spending, forecasted to increase by +0.5%, and personal income, expected to rise by +0.4%. Additionally, the February core PCE price index, the Fed’s preferred measure of inflation, is expected to show a +0.3% month-on-month increase and a +2.7% year-on-year rise. The revised March University of Michigan consumer sentiment index is projected to remain stagnant at 57.9.
The markets are currently pricing in a 16% probability of a -25 basis point rate cut following the FOMC meeting on May 6-7.
Eurozone Developments Impact EUR/USD
The EUR/USD exchange rate decreased by -0.07% on Tuesday. The euro initially gained ground but then fell to a 2-1/2 week low following dovish comments from ECB Governing Council member Villeroy de Galhau, who mentioned a “solid” disinflation trend in Europe and suggested the ECB has room for further interest rate cuts.
Initially, the euro had found support from the German IFO business climate survey, which rose to an 8-month high in March. However, hawkish remarks from other ECB members, including Kazimir and Muller, suggested a pause in the ECB’s interest rate cuts is possible, which gave a boost to the euro.
February new car registrations in the Eurozone fell by -3.4% year-on-year, marking the largest decline in five months.
The German IFO business climate survey rose by +1.4 to an expected 86.7, indicating favorable business conditions.
De Galhau stated that the ECB has opportunities for additional rate cuts, given the current disinflationary environment. Kazimir remarked that the ECB is “already now in the neutral rate zone” and cannot dismiss a pause in rate cuts for the near future. Muller added that future cuts will depend significantly on upcoming tariff announcements from the US.
Market swaps indicate a 69% probability of a -25 basis point rate cut by the ECB during the policy meeting scheduled for April 17.
Yen Shows Resilience Amid Bond Yield Rises
The USD/JPY exchange rate declined by -0.53% on Tuesday, as the yen rebounded from a 3-week low. The yen’s gains were supported by increasing Japanese government bond yields, with the 10-year JGB bond yield climbing to a 16-year high of 1.587%. The yen received additional support as US Treasury yields retreated from early gains.
Precious Metals Gain Amid Market Conditions
April gold (GCJ25) closed up +10.30 (+0.34%), while May silver (SIK25) increased by +0.737 (+2.20%). Both precious metals benefitted from a weaker dollar. They were further supported by expectations that US tariffs would be more targeted than initially thought, easing inflation concerns and allowing for a potential continuation of Fed rate cuts. The sharp decline in US consumer confidence to a 4-year low would likely influence Fed policy, which is bullish for precious metals. Furthermore, escalating geopolitical risks in the Middle East have increased safe-haven demand for these assets, with ongoing airstrikes in Gaza and strikes on Yemen adding to market uncertainty. Additionally, fund buying pushed gold prices higher, as long positions in ETFs reached a 17-month high.
Nonetheless, hawkish remarks from central bankers introduced bearish sentiment for precious metals. Kugler’s emphasis on a steady interest rate policy, along with caution from other ECB officials regarding rate cuts, tempered enthusiasm in the precious metals market.
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 are solely for informational purposes. For more information, please view the Barchart Disclosure Policy
here.
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