The dollar index (DXY00) on Wednesday extended this week’s rally and rose by +0.88% to a 2-month high.  Signs of strength in the US economy boosted the dollar Wednesday after the July ADP employment change rose more than expected by the most in four months, and Q2 GDP expanded more than expected.  Gains in the dollar accelerated Wednesday afternoon due to hawkish comments from Fed Chair Powell, who said the labor market “looks solid” and a moderately restrictive monetary policy is appropriate due to inflation risks from tariffs, which dampened speculation of Fed rate cuts.

The US July ADP employment change rose +104,000, stronger than expectations of +76,000 and the largest increase in four months.  Also, the Jun ADP employment change was revised upward to -23,000 from the previously reported -33,000.

US Q2 GDP rose +3.0% (q/q annualized), stronger than expectations of +2.6%.  The Q2 core PCE price index rose +2.5% q/q, stronger than expectations of +2.3% q/q.

US Jun pending home sales unexpectedly fell -0.8% m/m, weaker than expectations of a +0.2% m/m increase.

As expected, the FOMC voted 9-2 to keep the fed funds target rate unchanged at 4.25%-4.50%.  Fed Governors Bowman and Waller dissented in favor of a rate cut, the first time since 1993 that two members of the Fed board have dissented.

The Fed downgraded its economic view, as the post-FOMC statement said, “Although swings in net exports continue to affect the data, recent indicators suggest that growth of economic activity moderated in the first half of the year.” The FOMC had previously characterized growth as expanding “at a solid pace.”

Fed Chair Powell said the US labor market “looks solid,” and with tariffs starting to show in consumer prices, the current modestly restrictive policy stance is appropriate.

In the latest tariff news, President Trump today said he will impose a tariff rate of 25% on India starting August 1 and suggested he would add an additional penalty due to the country’s energy purchases from Russia.

Federal funds futures prices are discounting the chances for a -25 bp rate cut at 49% at the September 16-17 FOMC meeting and 38% at the following meeting on October 28-29.

EUR/USD (^EURUSD) Wednesday extended this week’s losses and fell sharply by -1.10% to a 7-week low.  Wednesday’s stronger dollar undercut the euro.  Additionally, the negative carryover from Monday is weighing on the euro, following the announcement of the EU-US trade deal, which was seen as favoring the US, with 15% tariffs imposed on most EU goods.  This could pose headwinds to the Eurozone economy due to the higher tariffs.  Better-than-expected Eurozone economic news today on Q2 GDP and July economic confidence is supportive of the euro.

Eurozone Q2 GDP rose +0.1% q/q and +1.4% y/y, stronger than expectations of unchanged m/m and +1.2% y/y.

Eurozone July economic confidence rose +1.6 to a 5-month high of 95.8, stronger than expectations of 94.5.

Swaps are pricing in a 13% chance of a -25 bp rate cut by the ECB at the September 11 policy meeting.

USD/JPY (^USDJPY) Wednesday rose by +0.61%.  The yen gave up overnight gains and fell to a 3.75-month low against the dollar after better-than-expected US economic news pushed the dollar higher.  Losses in the yen accelerated Wednesday after T-note yields jumped on hawkish comments from Fed Chair Powell. 

The yen initially moved higher in overnight trading after an 8.8 magnitude earthquake off the eastern coast of Russia prompted a tsunami warning for Tokyo Bay, which sparked some safe haven buying of the yen.   

The yen continues to be undercut by concerns that the LDP’s loss of its majority in Japan’s upper house in the July 20 elections may lead to fiscal deterioration in Japan’s government finances, as the government boosts spending and implements tax cuts. 

August gold (GCQ25) Wednesday closed down -28.20 (-0.85%), and September silver (SIU25) closed down -0.547 (-1.43%).  Precious metals moved lower on Wednesday, with gold dropping to a 1-month low and silver falling to a 2.5-week low.  Dollar strength undercut metals prices on Wednesday after the dollar index rallied to a 2-month high.   Also, higher T-note yields on Wednesday were bearish for precious metals. In addition, Wednesday’s stronger-than-expected US economic reports on July ADP employment and Q2 GDP are hawkish for Fed policy and may keep the Fed from cutting interest rates. 

Losses in gold prices accelerated in after-hours trading Wednesday afternoon as prices sank another -$30 an ounce from their closing level due to hawkish comments from Fed Chair Powell, who said a moderately restrictive monetary policy is appropriate due to inflation risks from tariffs.  Silver prices also fell on negative carryover from a -17% plunge in copper prices Wednesday to a 2.5-month low after President Trump excluded refined copper imports from tariffs.

Concerns that US tariff policy will undercut global growth are fueling some safe-haven demand for precious metals after President Trump on Wednesday said he will impose a tariff rate of 25% on India starting August 1 and suggested he would add an additional penalty over the country’s energy purchases from Russia.  Precious metals continue to receive safe-haven support from geopolitical risks, including the conflicts in Ukraine and the Middle East.