The dollar index (DXY00) today is down -0.10%. The dollar is trading lower as today’s decline of more than -2% in WTI crude oil prices caused the 10-year T-note yield to fall -3.5 bp. Still, the dollar is seeing underlying support after today’s US CPI report pushed the market's odds of an FOMC rate hike next week up to 88% from 75% on Thursday.
Today’s Aug US CPI report of +0.4% m/m was in line with market expectations, but the core CPI report of +0.3% m/m was slightly stronger than market expectations of +0.2% m/m. On a year-on-year basis, the Aug CPI report of +3.4% y/y was unchanged from July and was in line with market expectations. Meanwhile, the Aug core CPI report of +2.4% y/y eased slightly from July’s +2.5% and posted a new 5.5-year low, and was in line with market expectations.
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Today’s CPI report caused the markets to raise the odds for a +25 bp FOMC rate hike at next week’s meeting on September 15-16 to 88% from 75% on Thursday.
The dollar was undercut by today’s weaker-than-expected US consumer sentiment report. The University of Michigan’s preliminary Sep US consumer sentiment index fell by -3.9 points to 47.8, weaker than market expectations for a -0.6 point decline to 51.3.
Oct WTI crude oil prices (CLV26) are down more than -2% today, giving back part of Thursday’s +6.7% surge to a 3.5-month high. Oil prices are still sharply higher on the week, but fell back after the International Energy Agency today warned that high oil prices and restricted oil supply will cause the biggest drop in global oil demand this year since the Covid-19 pandemic.
There were reports that two ships were struck by unidentified projectiles near Oman on Thursday, presumably by Iran. Also, Axios reported that Saudi Crown Prince Mohammed bin Salman called President Trump twice on Thursday, asking him to launch a new military attack against the Houthis in Yemen, who are gaining control of more territory in Yemen near the critical Bab el-Mandeb Strait and have been striking Saudi oil facilities. Saudi Arabia told OPEC on Thursday that its crude production in August fell to 6.238 million bpd, the lowest since 1990.
EUR/USD (^EURUSD) is little changed today, with some underlying support from a weaker dollar. The euro is finding support from today’s decline in oil prices, a beneficial factor for the Eurozone economy, which is heavily dependent on imported oil. The euro also has carry-over support from the ECB’s interest rate hike on Thursday, which helped the euro’s interest rate differentials. The ECB also raised its 2026 Eurozone GDP forecast, a positive factor for the euro.
The markets are discounting a 78% chance of a +25 bp ECB rate hike at the ECB’s next policy meeting on October 29. The ECB, as expected, raised the deposit facility rate by +25 bp to 2.50% on Thursday and said inflation will stay above 2% for an "extended period."
USD/JPY (^USDJPY) is down by -0.62%. The yen is higher on today’s decline in oil prices, which benefits the Japanese economy, as Japan imports more than 90% of its energy.
The yen has carryover support from Thursday, when BOJ Board member Kazuyuki Masu said, "The BOJ will continue to raise the policy interest rate," given a prevailing price trend very close to 2% and accommodative financial conditions. He added that "if inflation accelerates here, there is a risk that the BOJ might inevitably need to implement a rapid policy interest rate hike."
The yen also has carryover support from Tuesday, when the Japanese health minister, who oversees the Government Pension Investment Fund (GPIF) that holds $2.1 trillion in assets, said the fund is still considering whether it needs to review its asset allocation. The recent jump in the 10-year Japanese JGB government bond yield to a 30-year high has fueled speculation that the GPIF may move to boost its allocation of Japanese government bonds, which would support the yen.
The yen also has underlying support from strong expectations of a BOJ rate hike later this month. The markets are discounting a 97% chance of a +25 bp BOJ rate hike at the September 18 policy meeting. The government favors a rate hike to support the yen and prevent inflationary pressures stemming from the weak yen. Finally, the yen has ongoing support from the recent coordinated US-Japan intervention and fears that further intervention might be forthcoming if the yen remains weak.
December COMEX gold (GCZ26) is up +11.0 (+0.25%), and December COMEX silver (SIZ26) is up +0.373 (+0.57%).
Precious metals prices are trading higher today due to the slightly weaker dollar and today’s decline in the 10-year T-note yield. However, gold and silver are being undercut by today’s slightly stronger-than-expected US CPI report and the higher market odds for an FOMC rate hike next week.
Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 5.75-month high last Thursday. Long holdings in silver ETFs rose to a 5.5-month high on August 25.
Strong central bank demand for gold is supportive of gold prices, following the Aug 7 news that bullion held in China's PBOC reserves rose by +640,000 ounces to 76.08 million troy ounces in July, the twenty-first consecutive month the PBOC boosted its gold reserves.
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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