The dollar index (DXY00) rallied to a 1.5-month high on Wednesday and finished up by +0.64%. The dollar found support Wednesday on signs of US economic growth after Aug retail sales rose more than expected. The dollar raced to its high Wednesday afternoon after the FOMC raised interest rates by 25 bp and signaled another rate hike by the end of the year. The dollar also found support after the FOMC raised its US 2026 GDP forecast and its core inflation estimate.

US Aug retail sales rose +1.2% m/m, stronger than expectations of +0.8% m/m and the biggest increase in 5 months. Aug retail sales ex-autos rose +1.4% m/m, stronger than expectations of +0.6% m/m.

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The US Aug import price index ex-petroleum rose +0.8% m/m, stronger than expectations of +0.3% m/m.

The US Sep NAHB housing market index fell -3 to match a 3.75-year low of 32, weaker than expectations of 34.

The FOMC, as expected, raised the fed funds target range by 25 bp to 3.75%-4.00% and said the rate hike will support a "timelier" return to 2% inflation. The committee added that, "While uncertainty remains elevated owing, in part, to geopolitical developments, domestic spending has been resilient, productivity growth is strong, and capital investment is robust."

The FOMC's dot plot of rate projections shows the median year-end projection for the federal funds rate at 4.125%, up from 3.750% in June, with 16 of 18 officials expecting to raise interest rates at least once more by year-end.

The FOMC raised its 2026 GDP forecast to 2.3%, compared to 2.2% in June, and raised its 2026 core inflation estimate to 3.4% by the end of 2026, up from 3.3% forecast in June.

Fed Chair Warsh said today's decision to raise interest rates was to "remove a dose of accommodation." He added that inflation is too high and has been for too long, as too many inflation categories are still rising more than 3%.

Markets are pricing in a 57% chance of a +25 bp Fed rate hike at the next FOMC meeting on October 27-28.

EUR/USD (^EURUSD) tumbled to a 1.5-month low on Wednesday and finished down by -0.68%. The dollar’s strength pressured the euro on Wednesday after the FOMC raised interest rates by 25 bp and signaled another 25 bp rate hike later this year.

The euro did find some support on Wednesday after Eurozone July industrial production fell less than expected. Also, Wednesday’s -3% fall in crude oil prices supports the Eurozone economy, which is heavily dependent on imported oil.

Eurozone July industrial production fell -0.1% m/m, a smaller decline than expectations of -0.2% m/m.

The markets are discounting a 52% chance of a +25 bp ECB rate hike at the ECB’s next policy meeting on October 29.

USD/JPY (^USDJPY) rose by +0.66% on Wednesday. The yen fell to a 1-week low against the dollar on Wednesday after the FOMC raised interest rates and signaled another rate hike this year. The yen also slid on Wednesday after Japan’s July core machine orders fell more than expected. In addition, the yen has carryover pressure from Tuesday’s report that said the Japanese government is considering a new defense spending target of 3.5% of GDP, which could boost government debt issuance to fund the increase and is bearish for the yen.

The yen garnered some support on Wednesday’s stronger-than-expected Japanese trade news for July. Also, Wednesday’s -3% fall in crude oil prices supports Japan’s economy and the yen, as Japan imports more than 90% of its energy.

The yen has some carryover support from last Tuesday, when the Japanese health minister, who oversees the Government Pension Investment Fund (GPIF) that holds $2.1 trillion in assets, said the fund is still considering whether it needs to review its asset allocation. The recent jump in the 10-year Japanese JGB government bond yield to a 30-year high has fueled speculation that the GPIF may boost its allocation to Japanese government bonds, which would support the yen.

The yen is supported by strong expectations of a BOJ rate increase this week. Markets are pricing in a 100% chance of a +25 bp BOJ rate hike at Friday’s policy meeting. The government favors a rate hike to support the yen and prevent inflationary pressures stemming from the weak yen. Finally, the yen has ongoing support from the recent coordinated US-Japan intervention and fears that further intervention might be forthcoming if the yen remains weak.

Japan July core machine orders fell -3,7% m/m, weaker than expectations of -1.2% m/m.

Japanese trade news was better than expected as Japan's Aug exports rose +19.3% y/y, stronger than expectations of +18.4% y/y. Also, Aug imports rose +28.0% y/y, stronger than expectations of +26.3% y/y and the largest increase in 3.75 years.

December COMEX gold (GCZ26) closed up +54.70 (+1.26%) on Wednesday, and December COMEX silver (SIZ26) closed up +1.063 (+1.66%).

Precious metals prices settled sharply higher on Wednesday. Falling crude prices are supportive for precious metals, as WTI crude oil sank more than -3% on Wednesday, which lowered inflation expectations and could persuade global central banks to pursue easier monetary policies, a bullish factor for precious metals. Lower global bond yields on Wednesday also supported precious metals.

However, gold prices plunged more than -$75.00 an ounce in post-market trading on Wednesday afternoon when the dollar rallied to a 1.5-month high after the Fed raised interest rates and signaled another rate hike this year.

Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 6.5-month high today. Long holdings in silver ETFs rose to a 5.5-month high on August 25.

Strong central bank demand for gold is supporting gold prices, after news last Monday that bullion held in China's PBOC reserves rose by +650,000 ounces to 76.73 million troy ounces in August, the largest increase in three years and the twenty-second consecutive month the PBOC boosted its gold reserves.

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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