Dollar Ends Lower as US Jobs Report Boosts Fed Rate Cut Chances

The dollar index (DXY00) Friday fell by -0.24% and posted a 3-week low.  The dollar retreated Friday after the US Jun payroll report bolstered expectations for the Fed to cut interest rates this year. Also, strength in the British pound (^GBPUSD) weighed on the dollar after a landslide victory by the UK Labour Party in Wednesday’s general election boosted the pound to a 3-week high.  Losses in the dollar were contained due to hawkish comments from New York Fed President Williams who said we still” have a way to go” to reach our 2% inflation target on a sustained basis.

US Jun nonfarm payrolls rose +206,000, stronger than expectations of +190,000.  However, May nonfarm payrolls were revised down to +218,000 from the previously reported +272,000.  Also, the Jun unemployment rate unexpectedly rose +0.1 to a 2-1/2 year high of 4.1%, showing a weaker labor market than expectations of no change at 4.0%.

US Jun average hourly earnings eased to +3.0% y/y from +4.1% y/y in May, right on expectations and the slowest pace of increase in 3 years.

New York Fed President Williams said, “Inflation is now around 2.5%, so we have seen significant progress in bringing it down.  But we still have a way to go to reach our 2% target on a sustained basis.”

The markets are discounting the chances for a -25 bp rate cut at 7% for the July 30-31 FOMC meeting 

and 76% for the following meeting on Sep 17-18.

EUR/USD (^EURUSD) Friday rose by +0.26% to a 3-week high.  Friday’s slump in the dollar supported moderate gains in the euro.  Gains in the euro were limited due to Friday’s weaker-than-expected news on Eurozone May retail sales and German May industrial production.  Also, concerns about the second round of France’s parliamentary elections on Sunday are weighing on the euro. 

Eurozone May retail sales rose +0.1% m/m, weaker than expectations of +0.2% m/m.

German May industrial production unexpectedly fell -2.5% m/m, weaker than expectations of a +0.1% m/m increase and the biggest decline in 17 months.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 6% for the July 18 meeting and 72% for the September 12 meeting.

USD/JPY (^USDJPY) Friday fell by -0.35%.  The yen on Friday climbed to a 1-week high against the dollar.  The yen garnered support from Friday’s Japanese economic news that showed the May leading index CI rose more than expected. Gains in the yen accelerated after T-note yields tumbled on Friday’s US Jun payroll report.  Strength in the yen was limited after Japan’s May household spending unexpectedly declined, a dovish factor for BOJ policy.

The Japan May leading index CI rose +0.2 to 111.1, stronger than expectations of 111.0.

Japan’s May household spending unexpectedly fell -1.8% y/y, weaker than expectations of +0.3% y/y and the biggest decline in 4 months.

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 51% for the July 31 meeting and 34% for the September 20 meeting.

August gold (GCQ4) Friday closed up +28.30 (+1.19%), and September silver (SIU24) closed up +0.847 (+2.75%).  Precious metals prices rallied Friday, with gold posting a 6-week high and silver posting a 5-week high.  Friday’s slump in the dollar index to a 3-week low was bullish for metals prices.  Also, Friday’s decline in global bond yields supports precious metals.  In addition, Friday’s US Jun payroll report showed that the unemployment rate unexpectedly rose to a 2-1/2 year high, and June average hourly earnings fell to a 3-year low, which is dovish for Fed policy and positive for precious metals.  Silver also found carryover support from Friday ‘s rally in copper prices to a 1-month high.

On the negative side for precious metals was Friday’s hawkish comments from New York Fed President Williams, who said the Fed still has a way to go to reach its 2% inflation target on a sustained basis.  Also, Friday’s rally in the S&P 500 to a new record high curbed safe-haven demand for precious metals.  A bearish factor for silver prices was Friday’s report on German May industrial production, which fell by the most in 17 months, a bearish factor for industrial metals demand.

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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.

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