Gold prices are sharply lower this morning, depressed by a huge rally in the US dollar. Risk-on sentiment combined with a much stronger dollar to trigger sell stops, leading to a cascading fall in prices. Both gold and silver are more than 2% lower this morning.
The US dollar has powered its way sharply higher, as its major peers all fall. The British pound has been hammered on the news that the government intends to invoke Article 50 of the Lisbon Treaty next March, in what is being called a “hard” Brexit. Prime Minister Theresa May told reporters that the concerns of London financial district would not be put above all others in the negotiation. This sent the GBP to its lowest point since the Brexit vote.
Across the Channel, the euro is experiencing some pain of its own. Not only is the common currency being sucked into the vortex from the meltdown in the pound, but wholesale prices in the EU unexpectedly fell.
Completing the trifecta, the dollar is advancing against the yen for the sixth session in a row.
Some of this dollar rally is being caused by upbeat economic reports in the US, and discouraging data from Europe and Asia. However, the lion’s share of the factors behind the jump in the dollar is coming from the Federal Reserve. Yesterday, Cleveland Fed president Loretta Mester said that not only had she voted for a rate hike last month, but she intended to do the same next month. She told reporters that expected “the case would remain compelling” for the Fed to raise interest rates six days before the Presidential election.
Noted policy hawk Jeffrey Lacker, president of the Richmond Fed, said that interest rates should be hiked now, as waiting too long will mean hiking faster later. In an eye-opening assessment, he said that the interest rate right now should be around 1.5%.
Joining the hawkish chorus, the IMF released a report today that forecast US inflation would rise to 2.3% next year. This is a year early than Fed forecasts, and would make a compelling reason to get in at least one rate hike this year.
Although the beefy dollar is depressing oil prices this morning, the afterglow of the OPEC production freeze negotiations was already fading. This could be seen as an expected consolidation after big gains from the irrational exuberance following the OPEC meeting in Algiers.
Markets from equities to pork bellies should start moving into a defensive posture ahead of Friday’s release of non-farm payroll numbers for September.
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