Chicago Fed President Austan Goolsbee stated that the Federal Reserve may need to raise interest rates further to restore price stability, driving the dollar index (DXY00) up by +0.16% and pressuring precious metals. The hawkish commentary suggests the central bank aims to narrow the gap between supply and demand, a process that could lead to drops in employment, wages, and growth.
Markets are currently pricing in a 53% chance of a 25 basis point Fed rate hike at the upcoming FOMC meeting on October 27-28. This monetary tightening outlook has weighed on gold, with December COMEX gold (GCZ26) falling -48.30 points, or -1.09%, while December COMEX silver (SIZ26) dropped -0.549 points, or -0.82%. The decline in precious metals was also fueled by stronger stock prices, which reduced safe-haven demand.
Despite the hawkish Fed signals, dollar gains were limited by a 4% plunge in WTI crude oil prices. The drop in energy costs eases inflation expectations and could persuade the Fed to loosen monetary policy later. Additionally, a stronger Chinese yuan climbed to a 3.5-year high, undercutting the dollar's strength. In the US, the August Chicago Fed national activity index fell -0.12 to -0.04, coming in right on expectations.
The euro was also pressured by dollar strength, with EUR/USD down by -0.13%. The 10-year German Bund yield fell to a one-week low of 3.442%, weakening the euro's interest rate differentials. However, the decline in crude oil prices supports the Eurozone economy, as Europe imports most of its energy. The German Bundesbank released a monthly report projecting that while Q3 GDP will expand only "modestly" due to short-term drivers like low water levels in the Rhine River, the economy is expected to grow at a "stronger" pace in Q4. The Bundesbank noted that "persistently high prices" for crude oil, natural gas, and electricity could delay the return of the inflation rate to 2%. Markets are discounting a 46% chance of a 25 basis point ECB rate hike at its next policy meeting on October 29.
The yen faced headwinds from dollar strength, with USD/JPY up by +0.31%. However, the drop in crude oil prices is a positive factor for Japan, which imports more than 90% of its energy. Lower T-note yields also supported the yen. Trading activity was below normal as Japanese markets were closed for the Respect-for-the-Aged Day holiday. Markets are pricing in a 19% chance of a 25 basis point BOJ rate hike at its next policy meeting on October 30.
Precious metals found some support from declining global bond yields and the recent fall in crude oil prices. Long holdings in gold ETFs climbed to a 6.5-month high, while long holdings in silver ETFs rose to a 5.5-month high on August 25. Central bank demand continues to support gold prices after news that bullion held in China's PBOC reserves rose by +650,000 ounces to 76.73 million troy ounces in August. This marked the largest increase in three years and the twenty-second consecutive month the PBOC boosted its gold reserves.