Dollar Pressured by Weaker-Than-Expected US CPI Report

The dollar index saw a slight decline following a weaker-than-expected US CPI report, which significantly increased market expectations for a 25 basis point Fed rate cut at the next FOMC meeting to 97%. This dovish sentiment, coupled with falling 10-year T-note yields and ongoing government shutdown concerns, largely overshadowed stronger-than-anticipated US manufacturing and services PMI data. Consequently, the Euro strengthened against the dollar, bolstered by robust Eurozone PMI figures. Precious metals, despite some technical selling, continue to benefit from safe-haven demand due to geopolitical risks and the prospect of Fed rate cuts, evidenced by multi-year highs in ETF holdings.

Analysis

The dollar index (DXY00) declined by -0.04% following a slightly weaker-than-expected US CPI report, which indicated a +0.3% m/m and +3.0% y/y increase against forecasts of +0.4% and +3.1% respectively. This data, coupled with a -1.4 bp drop in the US 10-year T-note yield, has significantly increased market expectations for a Federal Reserve rate cut, with a 97% probability priced in for a -25 bp reduction at the upcoming FOMC meeting. Despite the softer headline, the 3.0% y/y CPI matches a 16-month high, and core CPI remains above the Fed's 2.0% target, suggesting persistent inflationary pressures.

While consumer sentiment, as indicated by the University of Michigan index, fell by -1.4 points to 53.6, stronger-than-expected manufacturing and services PMI data presented a mixed economic picture. The Oct S&P US manufacturing PMI rose to 52.2 and the services PMI increased to 55.2, both exceeding expectations. However, the ongoing US government shutdown continues to exert bearish pressure on the dollar, amplifying concerns about potential economic suffering and further increasing the likelihood of Fed intervention.

The euro (EUR/USD) gained +0.06%, benefiting from dollar weakness and robust Eurozone PMI figures, with manufacturing rising to 50.0 and services to 52.6, both surpassing forecasts. In commodities, gold (GCZ25) saw a slight decline of -0.05% despite the dovish CPI, attributed to negative technical sentiment and long liquidation, while silver (SIZ25) fell -0.35% but found underlying support from stronger US PMI data. Precious metals generally continue to receive safe-haven support from geopolitical risks, central bank buying, and the bolstered outlook for Fed rate cuts, evidenced by multi-year highs in ETF holdings.

Key Decisions for Investors

• Investors should assess their USD exposure, given the 97% probability of a Fed rate cut and the dollar's vulnerability to weaker economic data and the government shutdown.
• Monitor Eurozone economic indicators, particularly PMI data, for sustained strength, which could continue to support EUR/USD appreciation against a weakening dollar.
• Consider strategic allocation to precious metals, as they are likely to benefit from ongoing safe-haven demand and the increased likelihood of Fed monetary easing, despite recent technical selling pressure.