The dollar index (DXY00) on Friday rose by +0.06%. The dollar found support as a hawkish US CPI report pushed odds of an FOMC rate hike next week up to 88% from 75% on Thursday. Also, the 10-year T-note yield on Friday rose by +0.6 bp, supporting the dollar’s interest rate differentials.
Friday’s -2.4% decline in oil prices initially caused the 10-year T-note yield to drop, despite the CPI report. However, the CPI report caught up with the T-note market by the end of the day, and the 10-year T-note yield ended slightly higher.
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Friday’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.
Friday’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 Friday’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) fell -2.4% on Friday, giving back part of Thursday’s +6.7% surge to a 3.5-month high. Oil prices still rose by a net +9.4% on the week, but fell back on Friday after the International Energy Agency 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.
EUR/USD (^EURUSD) fell by -0.14% on Friday, pressured by the stronger dollar. The euro was undercut during the week by a net +9% rally in oil prices, a negative factor for the Eurozone economy, which is heavily dependent on imported oil. The euro had underlying 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) fell by -0.46%. The yen saw support from Friday’s decline in oil prices, although oil prices rose +9% on the week, which was negative for the Japanese economy, since Japan imports more than 90% of its energy.
The yen had 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 had 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 boost its allocation to Japanese government bonds, which would support the yen.
The yen has support from strong expectations of a BOJ rate hike later this month. Markets are pricing in a 96% 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) on Friday closed up +1.60 (+0.04%), and December COMEX silver (SIZ26) closed up +0.261 (+0.40%).
Precious metals prices closed higher on Friday despite generally bearish factors such as a stronger dollar and a rise in the 10-year T-note yield. Precious metals prices were undercut by a slightly stronger-than-expected US CPI report and higher market odds of 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 news on August 7 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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