The dollar index (DXY00) today is up by +0.18%. The dollar is climbing today on easing global trade tensions, which are supportive of economic growth prospects. The US and South Korea finalized a trade deal today that will see South Korea make $150 billion in shipbuilding investments and cap US tariffs on South Korean goods at 15%. Also, President Trump said he expects to lower tariffs on Chinese goods over the fentanyl crisis.
Gains in the dollar are limited amid expectations that the FOMC will cut interest rates by 25 bp later today and possibly end quantitative tightening. The dollar remains under pressure from the ongoing US government shutdown. The longer the shutdown is maintained, the more likely the US economy will suffer and the more likely the Fed will have to cut interest rates.
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US Sep pending home sales were unchanged m/m, weaker than expectations of a +1.2% m/m increase.
The markets are discounting a 100% chance that the FOMC at the end of today’s 2-day meeting will announce a -25 bp rate cut in its federal funds target range to 3.75%-4.00%. Assuming the Fed proceeds with this week’s -25 bp rate cut, the markets are then discounting an 88% chance of another -25 bp rate cut at the next FOMC meeting on December 9-10. The markets are discounting an overall 115 bp rate cut by the end of 2026 to 2.95% from the current effective federal funds rate of 4.10%.
The FOMC at this week’s meeting is not scheduled to release a Summary of Economic Projections, which contains the Fed’s dot plot. That means the markets today will hear from Fed Chair Powell at his regular post-meeting press conference but will not receive an update from other Fed officials on their views about the future course of interest rates.
The markets are also expecting the FOMC to announce today that it is ending its quantitative tightening, which involves allowing its balance sheet to decline. A halt to the Fed’s quantitative tightening would be supportive for the stock and bond markets, as the Fed would no longer be draining liquidity from the US financial system.
The dollar still has some negative carryover from Monday by reduced safe-haven demand after US and Chinese negotiators, who met over the weekend in Malaysia, said they reached a tentative trade agreement. The agreement is expected to be finalized at Thursday’s summit between Presidents Trump and Xi on the sidelines of the APAC conference in South Korea. Treasury Secretary Bessent said the agreement means the US threat of a 100% tariff on US imports from China, set to start November 1, is “effectively off the table.” Meanwhile, China agreed not to restrict the export of rare earth metals for at least one year and to buy a “substantial” amount of US soybeans. The two sides also made progress on shipping fees and US demands that China crack down on the export to the US of fentanyl and precursors. The two sides may also reach an agreement that would allow US consumers to continue to access TikTok.
EUR/USD (^EURUSD) is down by -0.09% today due to strength in the dollar. Losses in the euro are limited by central bank divergence, with the ECB seen as finished with its rate-cut cycle while the Fed is expected to cut rates by at least another percentage point by the end of 2026.
Swaps are pricing in a 1% chance of a -25 bp rate cut by the ECB at the October 30 policy meeting.
USD/JPY (^USDJPY) is down by -0.07% today. The yen climbed to a 1-week high against the dollar today on comments made by Treasury Secretary Bessent, who said that the Japanese government’s “willingness to allow the BOJ policy space will be key to anchoring inflation expectations and avoiding excess exchange rate volatility.” Also, today’s jump in the Japan Oct consumer confidence index to a 10-month high is supportive for the yen. Higher T-note yields today are limiting gains in the yen.
The Japan Oct consumer confidence index rose +0.5 to a 10-month high of 35.8, stronger than expectations of 35.5.
The market consensus is that the Bank of Japan, at its policy meeting this week on Wednesday/Thursday, will keep its policy rate unchanged at 0.50%. The odds of a rate hike are only at 14%, according to Japanese swap rates.
December COMEX gold (GCZ25) today is up +49.40 (+1.24%), and December COMEX silver (SIZ25) is up +0.946 (+2.00%).
Precious metals prices are sharply higher today as they recover some of this week’s losses that knocked gold prices down to a 3-week low on Tuesday and silver prices down to a 1-month low. Expectations for the FOMC to cut interest rates by 25 bp and possibly end quantitative tightening later today are bullish for precious metals prices.
Precious metals also have underlying safe-haven support due to the ongoing US government shutdown, uncertainty over US tariffs, geopolitical risks, central bank buying, and political pressure on the Fed’s independence. In addition, recent weaker-than-expected US economic news has bolstered the outlook for the Fed to keep cutting interest rates, a bullish factor for precious metals.
Since posting record highs earlier this month, long liquidation pressures have weighed on precious metals prices. Precious metals prices this week have also been weighed down by reduced safe-haven demand following the US-China preliminary trade agreement announced over the weekend. In addition, this week’s rally in the S&P 500 to a new record high has curbed safe-haven demand for precious metals.
Precious metals prices have been under pressure this week amid heavy long liquidation and ETF outflows. Holdings in gold ETFs have fallen from last Tuesday’s 3-year high, and silver ETF holdings have dropped from last Tuesday’s 3.25-year high.
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