The U.S. dollar index (DXY00) relinquished its early Friday gains, closing largely unchanged as a downward revision to the University of Michigan’s May consumer sentiment index to a record low weighed heavily on the currency. This reversal occurred despite earlier support from hawkish remarks by Fed Governor Christopher Waller, who indicated a potential interest rate hike if inflation persists, underscoring the market’s sensitivity to economic data.
US Consumer Sentiment Hits Record Low, Inflation Expectations Rise
The University of Michigan’s May U.S. consumer sentiment index was revised lower to a record low of 44.8, a significant decline from the expected 48.2 and the weakest reading since data collection began in 1978. This stark figure signals deepening consumer pessimism regarding the economic outlook. Concurrently, inflation expectations showed an upward trend, with the May 1-year inflation expectations rate revised to a 9-month high of +4.8% from +4.5%, exceeding the +4.6% anticipated. The 5-10 year inflation expectations rate also saw an upward revision to a 7-month high of +3.9%, stronger than the +3.4% expected.
These developments complicate the Federal Reserve’s policy path. Fed Governor Christopher Waller reiterated his support for making it clear that the Fed’s next interest rate move is “just as likely to be an increase” if “inflation is not headed in the right direction.” Despite this hawkish stance, the dollar’s early support from Waller’s comments was ultimately overshadowed by the dismal consumer sentiment data and a broader rally in stocks, which curbed liquidity demand for the greenback. Swaps markets currently discount the odds at 0% for a 25 basis point rate cut at the upcoming FOMC meeting on June 16-17, suggesting that while a cut is off the table, the market remains wary of the Fed’s next move.
Eurozone Resilience Amidst ECB Hawkishness
Across the Atlantic, the euro (EUR/USD) experienced a marginal decline of -0.08% on Friday, yet managed to stay above Thursday’s 6-week low. The currency faced pressure from rising crude oil prices, which typically pose a negative impact on the Eurozone economy due to its reliance on energy imports. However, the euro’s losses were contained by stronger-than-expected economic indicators from Germany. The German May IFO business confidence index unexpectedly rose +0.4 to 84.9, surpassing expectations of a decline to 84.2. Similarly, the German June GfK consumer confidence index unexpectedly climbed +3.3 to -29.8, outperforming forecasts for a decline to -34.0.
Adding to the euro’s limited resilience were hawkish comments from ECB Governing Council member Alexander Demarco. He stated, “In June, the ECB will probably need to hike interest rates as we need to send a signal that we are committed to our medium-term 2% inflation target.” This firm commitment to combating inflation has led swaps markets to discount an 88% chance of a +25 basis point rate hike by the ECB at its next policy meeting on June 11.
Yen Under Pressure as Inflation Slows in Japan
The Japanese yen (USD/JPY) saw a rise of +0.09% against the dollar on Friday, reflecting ongoing pressure from weaker-than-expected inflation data. Japan’s April national CPI rose +1.4% year-over-year, falling short of the +1.6% expected. The core CPI, excluding fresh food and energy, increased by +1.9% year-over-year, weaker than the +2.2% anticipated and marking the slowest pace of increase in 1.75 years. This dovish inflation report suggests less urgency for the Bank of Japan (BOJ) to tighten monetary policy.
Further contributing to the yen’s weakness was a 2% rally in the Nikkei Stock Index to a 1-week high, which reduced safe-haven demand for the currency. Limiting the yen’s losses were weaker T-note yields and relief that the Japanese government might not need to boost bond sales for its supplementary budget. Japanese Finance Minister Satsuki Katayama indicated that the supplementary budget would be around 3 trillion yen ($18.9 billion) and that the likely cancellation of some government bond sales from last year’s budget would limit the need for fresh government debt issuance. Despite the weak inflation data, markets are still discounting a +76% chance of a 25 basis point BOJ rate hike at the next policy meeting on June 16, indicating persistent expectations for policy normalization.
Precious Metals Decline Amidst Stock Rally and Hawkish Central Banks
June COMEX gold (GCM26) and July COMEX silver (SIN26) both settled lower on Friday, down -19.30 (-0.42%) and -0.533 (-0.69%) respectively. The rally in stocks diminished safe-haven demand for precious metals, while hawkish comments from both ECB Governing Council member Alexander Demarco and Fed Governor Waller further weighed on prices. Demarco’s assertion that the ECB would “probably need to hike interest rates” and Waller’s support for a Fed rate increase if inflation doesn’t slow created a challenging environment for non-yielding assets.
However, losses in precious metals were somewhat contained by lower global bond yields. Geopolitical factors also provided some underlying support, with doubts surrounding a potential US-Iran peace plan to reopen the Strait of Hormuz. On the bearish side, recent fund liquidation saw long holdings in gold ETFs fall to a 5.25-month low on March 31, and silver ETFs to a 9.25-month low on May 5. Conversely, strong central bank demand for gold, particularly from China’s PBOC, offered support. The PBOC’s gold reserves increased by +260,000 ounces to 74.64 million troy ounces in April, marking the largest monthly increase in a year and the eighteenth consecutive month of accumulation.
Friday’s market dynamics underscored a complex interplay of economic data, central bank rhetoric, and shifting risk appetites. While hawkish signals from major central banks suggested continued vigilance against inflation, the pronounced weakness in U.S. consumer sentiment and the rally in equity markets ultimately dictated the dollar’s trajectory, leading to its retreat from earlier gains.
