The dollar index (DXY00) on Tuesday fell by -0.43% due to the increased chances of a Fed rate cut after the CPI report. The market boosted the chances for a Fed rate cut at the September meeting to 96% from 88%, after Tuesday’s US CPI report was roughly neutral and did not contain any nasty surprises.
The July US CPI report of +0.2% m/m was roughly in line with market expectations. The July CPI year-on-year figure of +2.7% y/y was unchanged from June and was slightly weaker than expectations for a +0.1 point increase to +2.8%. The July US core CPI report of +0.3% m/m was in line with expectations. The July year-on-year core CPI figure of +3.1% y/y was up from June’s +2.9% and was slightly stronger than market expectations of +3.0%. July’s headline CPI of +2.7% y/y and core CPI of +3.1% y/y were up from the post-Covid 4.25-year lows of +2.3% and +2.8%, respectively, posted earlier this year.
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Despite the neutral CPI report, the 10-year T-note yield rose +0.4 bp to 4.289% on concern about a new attack by President Trump on Fed Chair Powell. Mr. Trump said in a Truth Social post Tuesday morning that he is considering allowing a lawsuit against Mr. Powell related to construction work at Fed buildings. The markets are concerned about the inflation risks involved with the attempt by the Trump administration to push Mr. Powell out of the Fed as a means to artificially push interest rates lower.
In recent tariff news, President Trump extended the tariff truce with China, which was to expire on Tuesday, for another 90 days. Last Wednesday, President Trump announced that he will impose a 100% tariff on semiconductor imports. Still, companies would be eligible for exemptions if they demonstrate a commitment to building their products in the US. However, the US will levy a separate tax on imports of electronic products that employ semiconductors. Also, President Trump announced last Wednesday that he will double tariffs on US imports from India to 50% from the current 25% tariff, due to India's purchases of Russian oil. Last Tuesday, Mr. Trump said that US tariffs on pharmaceutical imports would be announced "within the next week or so." According to Bloomberg Economics, the average US tariff will rise to 15.2% if rates are implemented as announced, up from 13.3% earlier, and significantly higher than the 2.3% in 2024 before the tariffs were announced.
Federal funds futures prices are discounting the chances for a -25 bp rate cut at 96% at the September 16-17 FOMC meeting and 58% at the following meeting on October 28-29.
EUR/USD (^EURUSD) rose by +0.52% due to dollar weakness. However, sentiment on the euro remains cautious due to the negative impact of US tariffs on the European economy. Also, market expectations are low for any significant progress at Friday's Trump-Putin summit in Alaska regarding the Russia-Ukraine war.
Swaps are pricing in a 5% chance of a -25 bp rate cut by the ECB at the September 11 policy meeting.
USD/JPY (^USDJPY) fell by -0.30% despite overall weakness in the dollar. The yen continues to be undercut by concern that US tariff policies will harm the Japanese economy.
December gold (GCZ25) on Tuesday closed down -5.70 (-0.17%), and September silver (SIU25) closed up +0.215 (+0.57%). Gold prices fell on continued weakness after President Trump on Monday said that imports of gold will not face tariffs, easing supply fears. Gold was also undercut by a small rise in the 10-year T-note yield.
Gold prices saw underlying support Tuesday from the increased chances for a Fed rate cut following the CPI report. Gold also continues to have safe-haven support related to President Trump's tariffs and geopolitical risks, including the conflicts in Ukraine and the Middle East.
Fund buying of precious metals continues to support prices after gold holdings in ETFs rose to a two-year high on Monday, and silver holdings in ETFs reached a three-year high last Friday.
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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
