Dollar Rises Slightly Amid Tax Cut Hopes and Fed Comments

The dollar index (DXY00) increased by +0.17% on Wednesday, supported by improved prospects for President Trump’s tax cut proposals. This optimism followed House Republicans passing a budget blueprint on Tuesday evening. Additionally, hawkish comments from Atlanta Fed President Bostic reinforced the dollar’s strength; he stated that the Federal Reserve must maintain a restrictive monetary policy to combat inflation. However, gains were somewhat capped due to a significant decline in U.S. new home sales for January.

January Home Sales Weaker Than Anticipated

In January, new home sales dropped -10.5% month-over-month to 657,000 units, falling short of the expected 680,000.

Atlanta Fed President’s Remarks on Inflation

President Bostic emphasized the need for a restrictive posture on interest rates to exert downward pressure on inflation.

Upcoming Economic Events

The economic landscape this week is active. Thursday’s U.S. Q4 GDP report is predicted to show a +2.3% quarter-over-quarter annualized increase, with personal consumption expected to rise +4.1%. On Friday, the January PCE price index, the Fed’s preferred measure of inflation, is anticipated to moderate slightly to +2.5% year-over-year from December’s +2.6%. The core index is also expected to ease to +2.6% year-over-year, down from +2.8% in December. These expected PCE figures would maintain levels above the Fed’s +2% inflation target.

Market Expectations and Interest Rate Outlook

Currently, the market is pricing in only a 2% chance of a -25 basis point rate cut at the next FOMC meeting scheduled for March 18-19.

Euro Under Pressure from Dollar Strength

EUR/USD (^EURUSD) fell by -0.30% on Wednesday, primarily influenced by the robust dollar. The euro faced additional pressure after the German March GfK consumer confidence index unexpectedly dropped to an 11-month low. Furthermore, Wednesday saw the 10-year German bund yield decline to a 1-1/2 week low, weakening the euro’s interest rate appeal. Anticipations of increased U.S. tariffs on European goods have also contributed to the euro’s struggles.

German Consumer Confidence and ECB Policy Speculations

The German March GfK consumer confidence index decreased -2.1 to an 11-month low of -24.7, contrasting with expectations for an increase to -21.6. Swaps are now pricing in a 100% likelihood of a -25 basis point rate cut by the ECB at its March 6 policy meeting.

Pare Yen’s Movements Amid Global Trends

USD/JPY (^USDJPY) fell by -0.06% as the yen rallied from early losses, gaining momentum when T-note yields fell, bringing the 10-year T-note yield to a 2-1/2 month low. Initially, the yen faced pressure after a revision of Japan’s December leading index CI downward by -0.6 to 108.3 from a previously reported 108.9. Additionally, the 10-year Japan JGB bond yield fell to a 2-week low of 1.320%, adversely affecting the yen’s interest rate comparison.

Precious Metals Shift Higher

April gold (GCJ25) closed at +11.80 (+0.40%), while March silver (SIH25) rose by +0.446 (+1.40%). Precious metals found support on Wednesday from President Trump’s tariff threats, which heightened safe-haven demand. Lower global bond yields also provided positive momentum for these assets. Silver received additional backing from a rally in copper prices, which reached a 1-1/2 week high after Trump’s directive to examine potential tariffs on U.S. copper imports.

However, the stronger dollar and hawkish statements from Fed officials limited precious metals’ gains. Furthermore, a dip in inflation expectations reduced gold’s appeal as an inflation hedge; the U.S. 10-year breakeven inflation rate has decreased to a 7-week low.

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.
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