Fed Snooze, ECB Fireworks?

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Today, the Fed did exactly as expected. It raised interest rates by another 0.25% to 5.25% and dropped language anticipating further rate hikes ahead. In effect, it paused, while leaving the door open for future rate hikes if warranted based on incoming data. Snooze button pushed.

Tomorrow, it is the European Central Bank’s turn to deliver their interest rate decision at 8:15 a.m. EST. The ECB is expected to raise rates by 0.25% with two more to follow in the months ahead.

Given that the EU's core CPI was still extremely high at 5.7% relative to the United States’ and its key interest rate at just 3%, it was a toss-up between 25-50bp for the next hike just a week ago.

But after weak GDP numbers, sharply tighter credit conditions in the banking sector, and a lower-than-expected core CPI at 5.6%, expectations have increased significantly to a hike of just 25bp.

Now, one would have expected the EUR to fall on such odds, but it closed today at its highest rate since Mar 2022:

 … and the DXY had its lowest weekly closing level since Apr 2022:

Simply put, the risk of a 25bp hike and a lower EUR, higher DXY is... NOT PRICED IN.

Which means the likelihood is that the DXY rises as the EUR falls. What does that do to metals and miners? They go lower!

If you doubt the impact that the ECB’s decision will have on the DXY and therefore precious metals, consider that it was the ECB’s forecast of fewer rate hikes ahead on February 2nd that triggered the drop in the euro and the rally in the DXY. At the same time, Gold fell from a peak of 1959 to a low of 1809, an 8% drop.

Silver fell from 23.50 to 19.95, a far more substantial drop of over 15%.

While this is by no means a certainty, it all depends on what the ECB does tomorrow, but it is obviously worth watching.

Also look out for any headlines regarding stress in the banking sector. This could offset the effect of euro weakness on the metals and miners.