The Dollar Gains Modestly as Retail Sales Rise; Euro Weakens on Economic Concerns
Key Economic Data Influences Market Fluctuations
The dollar index (DXY00) increased by +0.08% on Tuesday. After U.S. retail sales for November exceeded expectations, the dollar experienced modest strengthening. A decline in stock performance on the same day heightened demand for the dollar, although gains were somewhat offset after U.S. November manufacturing production came in weaker than anticipated. Additionally, Treasury note yields, which initially rose, reverted to lower levels.
U.S. retail sales for November climbed by +0.7% month-over-month, surpassing expectations of +0.6%. In contrast, retail sales excluding automobiles increased by just +0.2%, falling short of the projected +0.4% rise.
In manufacturing, production only rose by +0.2% in November, which was below the anticipated +0.5% growth. Furthermore, the NAHB housing market index for December remained unchanged from November at 46, disappointing predictions of an increase to 47.
Market expectations indicate a 95% chance of a -25 basis point rate cut at the Federal Open Market Committee (FOMC) meeting scheduled for December 17-18.
Eurozone Struggles Amidst Dovish Sentiment
The EUR/USD (^EURUSD) declined by -0.23% on Tuesday. A firmer dollar contributed to the euro’s moderation, while the German IFO business climate index for December dropped more than expected to a 4-1/2 year low. Additionally, comments from ECB Governing Council member Rehn suggested ongoing reductions in interest rates as inflation begins to stabilize around the 2% target. However, the euro’s losses were limited by an unexpected increase in the German ZEW expectations of economic growth index, which rose by +8.3 to a 4-month high of 15.7, defying the anticipated fall to 6.9.
Meanwhile, the German IFO business climate index fell by -0.9 to 84.7, less than the expected 85.5.
Rehn articulated, “The direction of the ECB’s monetary policy is clear,” emphasizing that interest rates will continue to decrease as inflation stabilizes. Swaps predict a 100% likelihood of a -25 basis point rate cut by the ECB during its next meeting on January 30, with a 10% chance of a -50 basis point cut.
Yen Shows Resilience Despite Market Pressure
On Tuesday, the USD/JPY (^USDJPY) fell by -0.50%. The yen showed a moderate increase after its recent decline to a 2-1/2 week low suggested that further weakness might trigger a response from Japanese authorities, raising the likelihood of a Bank of Japan (BOJ) rate hike. However, the yen’s upside appears limited as expectations grow for the BOJ to maintain current interest rates during its meeting on Thursday.
Precious Metals Retreat as Economic Factors Weigh
February gold (GCG25) closed down -8.00 (-0.30%), and March silver (SIH25) fell -0.136 (-0.44%) on Tuesday. Both precious metals experienced moderate declines, with gold dropping to a one-week low and silver reaching a two-week low. The stronger-than-expected retail sales data for November placed additional pressure on the dollar, potentially leading the Federal Reserve to pause interest rate cuts—a negative indicator for precious metals. Additionally, reduced manufacturing production diminished demand prospects for industrial metals, further impacting silver prices amidst long liquidation ahead of the FOMC meeting outcomes.
In response to dovish remarks from Rehn regarding interest rate cuts, demand for gold as a store of value increased. Expectations for a -25 basis point interest rate cut by the Fed after the FOMC meeting also bolster precious metals’ appeal. Furthermore, geopolitical risks, such as the recent instability in Syria and the ongoing Ukraine-Russia conflict, continue to provide safe-haven support for these metals.
On the date of publication, Rich Asplund did not hold (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article are intended solely for informational purposes. For more information, please refer to 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.
