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Dollar Index Faces Decline

The dollar index (DXY00) experienced a notable decline on Monday, falling by -0.32% to reach a 1.5-month low. Unfavourable US unemployment figures from the previous Friday have increased expectations for Federal Reserve easing by year-end. Concerns about the Fed’s independence further exacerbate the situation, as President Trump’s attempts to dismiss Fed Governor Cook raise alarms amongst foreign investors.

Federal Reserve Rate Expectations

Currently, markets are pricing in a slim 15% chance of a 50 basis point cut at the forthcoming FOMC meeting, slated for September 16-17. Previously, this scenario was deemed improbable. Post an anticipated -25 basis point cut in September, there is now an 81% chance of another -25 basis point reduction by the end of October. By year-end, markets forecast an overall rate cut to 3.62% from the existing 4.38%.

Euro Gains Amidst Dollar Weakness

On the very same Monday, the EUR/USD (^EURUSD) advanced by +0.40%, given the weakening dollar. The market perceives the ECB as having concluded its rate-cut cycle, in contrast to the Fed’s anticipated three cuts within this year. Eurozone economic news was somewhat mixed. Although German July industrial production rose above expectations by 1.3%, the Eurozone Sep Sentix investor confidence index plummeted to a five-month low of -9.2.

Geopolitical Tensions and Euro Impact

Efforts to diplomatically resolve the Ukraine conflict remain stagnant, which doesn’t bode well for the euro. Political turbulence in France further complicates the euro’s stability. French Prime Minister Bayrou’s resignation following a failed confidence motion underscores the political uncertainty.

Precious Metals Rise

Monday saw precious metals climb higher, with December gold (GCZ2) rising by +0.66% and silver (SIZ2) by +0.84%. The dollar’s weakening bolstered metals, alongside the disappointing US payroll data, which favours further Fed easing. China’s increased gold purchases also lend support. Furthermore, geopolitical uncertainties and US tariffs continue to boost gold’s appeal as a safe asset. Notably, ETF fund buying is pushing gold and silver holdings to multi-year highs.

Japanese Yen and Political Uncertainty

The USD/JPY (^USDJPY) saw a slight increase of +0.03%. Political instability struck Japan, with Prime Minister Ishiba announcing his resignation following electoral defeats of the ruling Liberal Democratic Party. This political shift hints at a potential expansionary fiscal policy. However, an upward revision in Japan’s Q2 GDP to +2.2% provided some support for the yen.

Economic Indicators from Japan

The Japan Aug Eco Watchers Outlook Survey marked a 7-month high, aligning with expectations at 47.5. Such data points lend weight to a cautiously optimistic economic outlook amidst political upheaval.

Concluding Thoughts

As we navigate these intricate economic waters, the interplay of global politics, market expectations, and central bank decisions perpetuates the dynamic shifts observable in currency values and commodity prices.

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Please note that Rich Asplund had no positions in the securities mentioned at the time of publication. The views expressed are solely those of the author. For further details, view the Barchart Disclosure Policy.