The Dollar Index (DXY00) is down -0.22% as underlying dollar bearish sentiment outweighed today’s better-than-expected US GDP report and lower chances of the Federal Reserve easing monetary policy. Markets have today reduced the odds of a -25bp rate cut from 20% to 13% at the next FOMC meeting on January 27-28.
The dollar continues to see underlying weakness as the FOMC is expected to cut interest rates by approximately -50bp in 2026, while the BOJ is expected to raise rates by another +25bp in 2026, and the ECB is expected to leave rates unchanged in 2026.
The dollar is also under pressure as the Federal Reserve increases liquidity in the financial system, having started buying $40 billion a month in Treasury bills in mid-December. The dollar is also being weakened by concerns that President Trump intends to appoint a dovish Federal Reserve chair, which would be bearish for the dollar. Trump recently said he will announce his choice for the new Federal Reserve chair in early 2026. Bloomberg reported that National Economic Council Director Kevin Hassett is the most likely choice as the next Federal Reserve chair, seen by markets as the most moderate candidate.
US Q3 real GDP rose +4.3% (QoQ annualized), stronger than expectations of +3.3% and Q2 rate of +2.5%. The third quarter GDP price index rose +3.8% (quarter-on-quarter annualized), much stronger than expectations of +2.7% and up from +2.1% in the second quarter. The core PCE price index for the third quarter increased +2.9% (annualized quarter-on-quarter), in line with expectations, but above the +2.6% in the second quarter.
The Conference Board’s US Consumer Confidence Index for December fell -3.8 points to 89.1 from November’s revised level of 92.9 (88.7 preliminary), weaker than expectations for a 91.0 report.
The Philadelphia Fed Non-Manufacturing Index for December fell -0.5 points to -16.8 from -16.3 in November, which was weaker than expectations for an increase to -15.0.
October Durable Goods Orders fell -2.2% MoM, below expectations of -1.5%. October Durable Goods Orders excluding transportation rose +0.2% MoM, slightly below market expectations of +0.3%. October core capital goods orders (excluding transportation and defense), a proxy for capital spending, rose +0.5% mom, slightly stronger than market expectations of +0.3%.
November US industrial production fell -0.1% mom, slightly below market expectations of +0.1%. November manufacturing production fell -0.4% mom, below market expectations of +0.1%.
The Richmond Fed Manufacturing Index for December rose +8 points to -7 from -15 in November, and was stronger than market expectations of -10.
EUR/USD (^EURUSD) is up +0.11% due to dollar weakness. The euro is supported by comments from ECB members this week, indicating satisfaction with the current outlook for no interest rate cuts.
ECB Governing Council member Yannis Stournaras said today that the ECB is in a “good place” but needs to remain flexible to move policy in any direction. He said: “If we find ourselves in a better or weaker position than expected, we will take appropriate action.”
ECB Governing Council member Gediminas Simkus on Monday indicated his satisfaction with the current level of interest rates, saying: “We have inflation – general and core – both now and in the near future, and in the medium term, close to the 2% level. Many consider the interest rate to be at a neutral level. Economic growth has improved, although it remains slow.”
Meanwhile, Peter Kazimir, a member of the ECB’s Governing Council, said on Monday that the ECB is comfortable with current rates but is ready to act if conditions change. He said the current period of on-target inflation and steady economic expansion is “quite fragile” and that risks from tariffs and the war between Russia and Ukraine remain.
Swaps are pricing in a 0% chance that the ECB will cut rates by -25 bps at the next monetary policy meeting on February 5.
USD/JPY (^USDJPY) is down -0.39% today. The yen rallied on Monday and today after Finance Minister Satsuki Katayama said Japan has a “free hand” to intervene against currency moves that are not in line with fundamentals, a reference to the yen’s weakness last Friday after the BOJ’s rate hike.
The yen has underlying support from last Friday’s +25bp rate hike by the Bank of Japan. The yen is also supported by interest rate differentials, with the 10-year JGB yield rising by +5.2 bps today to a new 26-year high of 2.073%.
Markets are pricing in a 0% chance of the BOJ raising rates at the January 23 policy meeting.
February COMEX Gold (GCG26) is up +16.7 (+0.37%), and March COMEX Silver (SIH26) is up +1.555 (+2.27%). Gold and silver hit all-time highs on the nearest futures charts today.
Gold and silver prices are higher today despite reduced chances of a Fed rate cut after today’s strong US GDP report. The strong GDP report supported prices for silver and other industrial metals, with copper hitting an all-time high today.
Underlying bullish factors for precious metals include the FOMC’s recent announcement of a $40 billion monthly liquidity injection into the US financial system. Precious metal prices are also being boosted by geopolitical risks, as the United States seeks to seize two more oil tankers linked to Venezuela. In addition, Ukraine at the end of last week collided for the first time with a tanker from Russia’s shadow fleet in the Mediterranean Sea.
Precious metals have safe haven support linked to uncertainty over US tariffs and geopolitical risks in Ukraine, the Middle East and Venezuela. Additionally, precious metals are supported by concerns that the Federal Reserve will pursue looser monetary policy in 2026 as President Trump intends to appoint a prudent Federal Reserve chair.
Strong demand for gold from the central bank supports prices, following recent news that bullion held in China’s PBOC reserves increased by +30,000 ounces to 74.1 million troy ounces in November, the 13th consecutive month in which the PBOC has increased its gold reserves. Additionally, the World Gold Council recently reported that global central banks purchased 220 MT of gold in the third quarter, up +28% from the second quarter.
Silver is supported by concerns over low Chinese silver inventories. Silver inventories in warehouses linked to the Shanghai Futures Exchange fell on November 21 to 519,000 kilograms, the lowest level in 10 years.
Demand for precious metals funds remains strong, with long holdings in silver ETFs hitting a 3.5-year high last Tuesday.
On the date of publication, Rich Asplund had no (directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article are for informational purposes only. This article was originally published on Barchart.com
