Dollar Ticks Up and Gold Slides on US Inflation News

The dollar index (DXY00) rallied to a 1.5-year high on Wednesday and finished up by +0.37%.  The dollar advanced on Wednesday on the stronger-than-expected US Sep CPI report, which bolsters speculation that the Fed will keep interest rates higher for longer. The CPI report boosted the chance of a Fed rate hike at this month’s FOMC meeting to 34% from 22% before the report. Also, Wednesday’s +1% rise in WTI crude oil boosted inflation expectations and could push the Fed to keep tightening monetary policy, supporting the dollar.  In addition, Wednesday’s Fed Beige Book warned of intensifying price pressures that are hawkish for Fed policy and bullish for the dollar.

Comments on Wednesday from Fed Vice Chair Michelle Bowman signaled she favors keeping Fed policy steady at this month's FOMC meeting and were negative for the dollar when she said, "We have some time to wait and see how financial conditions and the economy evolve before we decide that we need to take any more action" on interest rates.

US MBA mortgage applications fell -2.7% in the week ended October 9, with the purchase mortgage sub-index down -4.0% and the refinancing mortgage sub-index down -0.4%.  The average 30-year fixed-rate mortgage rose +1 bp to a 2.75-year high of 7.50% from 7.49% the prior week.

US Sep CPI rose +3.7% y/y, stronger than expectations of +3.6% y/y.  Sep core CPI rose +2.6% y/y, stronger than expectations of 2.5% y/y.

The Fed Beige Book was hawkish, noting that most of the twelve Fed districts in the six weeks through October 5 reported economic growth, and half saw robust or intensifying price pressures.

Markets are pricing in a 34% chance of a +25 bp Fed rate hike at the next FOMC meeting on October 27-28. 

EUR/USD (^EURUSD) fell to a 17-month low on Wednesday and finished down by -0.39%.  The euro was under pressure Wednesday after the stronger-than-expected US Sep CPI report boosted the dollar.  Also, Wednesday’s rally in European nat-gas prices to a 3-75-year high and the +1% increase in crude oil prices is negative for the Eurozone economy and the euro as Europe imports most of its energy.

The German Sep wholesale price index rose +8.7% y/y from +6.8% y/y in Aug, the strongest pace of increase in nearly 3.5 years.

The markets are discounting a 12% chance of a +25 bp ECB rate hike at the ECB’s next policy meeting on October 29.

USD/JPY (^USDJPY) fell by -0.08% on Wednesday.  The yen rebounded from a 2.5-week low against the dollar on Wednesday and moved higher after T-note yields fell from early highs and moved lower, sparking short covering in the yen.   

The yen initially fell on Wednesday after a stronger-than-expected US Sep CPI report boosted the dollar.  Also, Wednesday’s +1% increase in crude oil prices is bearish for Japan’s economy and the yen, as Japan imports more than 90% of its energy.  In addition, Wednesday’s decline in the 10-year Japan JGB bond yield to a 3.5-week low of 2.997% weakened the yen’s interest rate differentials.

The yen also has negative carryover from Tuesday on a report that said BOJ officials pushed back against an interest rate hike at this month's policy meeting, saying they see little need for consecutive rate hikes in the absence of signs that upside inflation risks will increase abruptly.

Markets are pricing in a 5% chance of a +25 bp BOJ rate hike at the next policy meeting on October 30.

December COMEX gold (GCZ26) closed down -69.40 (-1.66%) on Wednesday, and December COMEX silver (SIZ26) closed down -3.648 (-6.13%).

Precious metals prices plummeted on Wednesday, with gold falling to a 1-week low and silver dropping to a 3-month low.  Wednesday’s surge in the dollar index to a 1.5-year high weighed on metals.  Also, Wednesday’s stronger-than-expected US Sep CPI report was hawkish for Fed policy and negative for precious metals.  In addition, Wednesday’s Fed Beige Book warned of rising price pressures, which is hawkish for Fed policy and is bearish for precious metals.  Finally, Wednesday’s +1% rise in crude oil prices raises inflation expectations and could persuade the world’s central banks to tighten monetary policy, a negative factor for precious metals.

Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 4-year high last Thursday.  Long holdings in silver ETFs rose to a 6.5-month high on September 22.

Strong central bank demand for gold is supporting gold prices, after last Thursday’s 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.