The dollar index (DXY00) fell -0.27% on Friday as weak US retail sales and consumer sentiment reports reduced the odds of a September Fed rate hike to 32% from 35% on Thursday. The dollar's decline was curbed by the 10-year T-note yield rising +5 bp despite the weak US economic reports, driven by inflation concerns.

The dollar was also undercut by reduced safe-haven demand as President Trump appears to have given up on plans for any new major military attack on Iran for the time being, favoring economic pressure instead. Treasury Secretary Bessent said on Friday that the administration will soon announce unprecedented economic measures against Iran that "have never been seen in the history of economic isolation of a country." Yet, the military conflict continues as there were reports that Iran attacked two Abu Dhabi oil vessels in the Strait of Hormuz on Thursday night.

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Friday's July US retail sales fell -0.6% m/m, much weaker than market expectations of +0.1%. Ex-autos and gas, July retail sales fell -0.2% m/m, weaker than market expectations of +0.3%. July's weak month-on-month retail sales report was partly due to technical factors, as June sales were temporarily bolstered by World Cup spending and by Amazon's Prime Day being held in June rather than in July last year. Yet, the weak retail sales report suggested that US consumers are pulling back due to high prices, increased gasoline costs, and a lack of confidence in their finances.

The University of Michigan's preliminary August US consumer sentiment index fell by -4.2 points to 51.0, weaker than market expectations for only a small -0.2 point decline to 55.0 from July's 55.2.

The markets are discounting a 32% probability of a +25 bp rate hike at the next FOMC meeting on September 15-16, down from 35% on Thursday and 51% as recently as Tuesday.

EUR/USD (^EURUSD) rose +0.34% on dollar weakness. Also, the odds of an ECB rate hike in September of 92% far exceed the 32% odds of a Fed rate hike, supporting the euro's interest rate differentials.

The markets are discounting a 92% chance of a +25 bp ECB rate hike at its next policy meeting on September 10.

USD/JPY (^USDJPY) fell -0.08% on dollar weakness. The yen has underlying support from increased expectations of a BOJ rate hike after Bloomberg reported Thursday that Japanese Prime Minister Sanae Takaichi's government supports a BOJ rate hike in either September or October. The government favors a rate hike to support the yen and prevent inflationary pressures stemming from the weak yen. 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.

The markets are discounting an 81% chance of a +25 bp BOJ rate hike at the September 18 policy meeting, up from 63% on Wednesday. The yen continues to suffer from weak interest rate differentials, with the BOJ's current policy rate of 1.00% well below the Fed's federal funds rate target range of 3.50%-3.75%.

October COMEX gold (GCV26) on Friday closed up +16.40 (+0.37%), and September COMEX silver (SIU26) closed up +0.115 (+0.18%).

Precious metals prices on Friday found support from a weaker dollar and reduced expectations for a Fed rate hike. There was also some safe-haven demand on reports that Iran attacked two ships in the Strait of Hormuz overnight.

Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 10.25-month low on July 27, after reaching a 3.5-year high on February 27. Also, long holdings in silver ETFs fell to a 1-year low on July 14 from the 3.5-year high posted on December 23.

Strong central bank demand for gold is supportive of gold prices, following last Friday's news that bullion held in China's PBOC reserves rose by +640,000 ounces to 76.08 million troy ounces in July, the twenty-first 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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