Dollar Posts 1.5-week High on Expectations for Hawkish FOMC Commentary

The dollar index (DXY00) is up +0.26%, posting a new 1.5-week high and posting the third consecutive session gain. 

The dollar is seeing support ahead of the 2-day FOMC meeting that begins today, amid expectations that Fed Chair Warsh will deliver somewhat hawkish commentary on future rate hikes to curb above-target inflation.  The markets are discounting only a 9% chance of a rate hike at this week’s meeting, but a 91% chance of a rate hike at the FOMC’s next meeting on December 8-9.

The dollar has underlying safe-haven support from Middle East tensions as concerns continue about Houthi attacks on Saudi Arabia and speculation about whether the US and Israel will launch new military attacks on Iran and/or the Houthis after today’s Israeli election and next Tuesday’s (Nov 3) US election.

Today’s US economic reports were mixed. 

The Sep US durable goods orders report of +1.8% was slightly weaker than market expectations of +1.9% m/m, but was still a relatively strong report.  Sep durable goods orders ex-transportation rose +0.5% m/m, slightly weaker than market expectations of +0.6%.  Sep core capital goods orders, excluding defense and air transportation, rose +1.2%, stronger than market expectations of +0.8%.

US home price reports were mixed.  The Aug FHFA House Price Index rose +0.3% m/m, slightly stronger than market expectations of +0.2%.  However, the S&P Cotality CS 20-City home price index rose +0.27% m/m and +2.65% y/y, slightly weaker than market expectations of +0.30% m/m and +2.61% y/y.

The Conference Board’s Oct US consumer confidence index rose +7.5 points to 91.7 from September’s revised 84.2 (preliminary 81.9), much stronger than market expectations for a decline to 81.0.

Oct US new home sales fell -0.6% m/m to 676,000, stronger than expectations for a larger decline to 651,000.

EUR/USD (^EURUSD) is down -0.23% on dollar strength. 

Markets are pricing in only a 3% chance of a +25 bp ECB rate hike at this Thursday’s ECB policy meeting. However, the market is pricing in a larger 76% chance of a rate hike at the ECB’s next policy meeting on December 17.

The euro has some underlying support as the situation in France has improved a bit after weekend demonstrations did not involve the large-scale violence and looting seen in previous demonstrations.  Moody’s also did not downgrade France’s debt rating, leaving France’s bond rating unchanged at Aa3 with a negative outlook.  The French 10-year OAT government bond yield is unchanged at 4.90% today, well below last Thursday’s 24-year high of 5.14%.

USD/JPY (^USDJPY) is up +0.17% on dollar strength.  The yen has weakened this week, following last week’s safe-haven strength on the sharp sell-off in the global stock markets.

The yen has underlying support on expectations that the BOJ will maintain a hawkish policy stance at its meeting this Friday, likely raising its inflation forecast for fiscal 2027. The odds of a BOJ rate hike at Friday’s meeting are very low at 2%, although those odds rise to 67% for a BOJ rate hike at the following meeting on December 18. 

December COMEX gold (GCZ26) is up +23.1 (+0.57%), and December COMEX silver (SIZ26) is down -0.096 (-0.18%).

Gold has continued higher today following last week’s overall -4.1% sell-off.  Last week’s gold sell-off was sparked mainly by the sharp stock market sell-off and the liquidation of precious metals positions to cover losses.

Gold is seeing support today from the -0.2 bp decline in the 10-year T-note yield, but is being undercut by the higher dollar.

Gold has underlying safe-haven support from Middle East tensions, with persistent attacks by the Houthis on Saudi targets and speculation about a possible new US military attack on Iran after next Tuesday’s US election.

Gold prices were undercut last Tuesday when Russia’s central bank reported reducing its gold reserves to 72.8 million ounces as of October 1, the lowest level in 7 years.  Russia’s central bank is the sixth largest holder of gold among the world’s central banks.

Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 4.25-year high last Wednesday, although those holdings have since backed off. Long holdings in silver ETFs rose to a 7.5-month high on Monday.

Strong central bank demand for gold is supporting gold prices, after recent news showed that bullion held in China's PBOC reserves rose by 740,000 ounces to 77.47 million troy ounces in September, the largest increase in three years and the twenty-third 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.