The dollar index (DXY00) today is down slightly by -0.03%. The dollar gave up an early advance today and turned lower after the Dec Dallas Fed manufacturing outlook of general business activity unexpectedly declined. The dollar initially moved higher today as stock market weakness boosted some liquidity demand for the dollar. Also, today's stronger-than-expected Nov pending home sales report was supportive for the dollar.
The markets are discounting the odds at 19% for a -25 bp rate cut at the FOMC's next meeting on January 27-28.
The dollar continues to see underlying weakness as the FOMC is expected to cut interest rates by about -50 bp in 2026, while the BOJ is expected to raise rates by another +25 bp in 2026, and the ECB is expected to leave rates unchanged in 2026.
The dollar is also under pressure as the Fed boosts liquidity in the financial system, having begun purchasing $40 billion a month in T-bills in mid-December. The dollar is also being undercut by concerns that President Trump intends to appoint a dovish Fed Chair, which would be bearish for the dollar. Mr. Trump recently said that he will announce his selection for the new Fed Chair in early 2026. Bloomberg reported that National Economic Council Director Kevin Hassett is the most likely choice as the next Fed Chair, seen by markets as the most dovish candidate.
US Nov pending home sales rose +3.3% m/m, stronger than expectations of +0.9% m/m.
The US Dec Dallas Fed manufacturing outlook of general business activity unexpectedly fell -0.5 to -10.9 versus expectations of an increase to -6.0.
EUR/USD (^EURUSD) today is up by +0.02%. The euro recovered from modest losses today and turned higher after the dollar weakened. The euro initially moved lower today after there was no breakthrough seen in weekend talks to end the Russian-Ukrainian war. Also, lower Eurozone government bond yields are pressuring the euro after the 10-year German bund yield fell to a 3-week low today at 2.824%, weakening the euro's interest rate differentials.
Swaps are pricing in a 0% chance of a +25 bp rate hike by the ECB at the next policy meeting on February 5.
USD/JPY (^USDJPY) today is down by -0.22%. The yen is climbing against the dollar today after the summary of the December 19 BOJ meeting showed that some policymakers signaled Japan's real interest rate remains very low, suggesting further rate increases are likely. The yen is also supported today by lower T-note yields.
The markets are discounting a 0% chance of a BOJ rate hike at the next meeting on January 23.
February COMEX gold (GCG26) today is down -207.10 (-4.55%), and March COMEX silver (SIH26) is down -6.561 (-8.53%).
Gold and silver are sharply lower today, with gold falling to a 1.5-week low. Mar silver fell from a contract high, and nearest-futures (Z25) silver retreated from a record high of $81.85 a troy ounce. The summary of the December 19 BOJ meeting is weighing on precious metals, as it showed that some policymakers signaled that Japan's real interest rate remains very low, suggesting further rate increases are likely. Losses in precious metals accelerated today after the CME raised margin levels for trading, sparking some long liquidation pressure.
Precious metals prices are seeing continued support from geopolitical concerns as the US continues its blockade of sanctioned oil tankers connected with Venezuela and launched a military attack on ISIS targets in Nigeria last Thursday.
Bullish underlying factors for precious metals include the FOMC's announcement on December 10 of a $40 billion per month liquidity injection into the US financial system. Precious metals have safe-haven support tied to uncertainty over US tariffs and geopolitical risks in Ukraine, the Middle East, and Venezuela. In addition, precious metals are supported by concerns that the Fed will pursue an easier monetary policy in 2026 as President Trump intends to appoint a dovish Fed Chair.
Strong central bank demand for gold is supportive of prices, following the recent news that bullion held in China's PBOC reserves rose by +30,000 ounces to 74.1 million troy ounces in November, the thirteenth consecutive month the PBOC has boosted its gold reserves. Also, the World Gold Council recently reported that global central banks purchased 220 MT of gold in Q3, up +28% from Q2.
Fund demand for precious metals remains strong, with long holdings in gold ETFs climbing to a 3.25-year high last Friday. Also, long holdings in silver ETFs rose to a 3.5-year high last Tuesday.
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.
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