Dollar Retreats Despite Increased Odds of December Rate Hike

September U.S. Dollar Index futures closed lower on Thursday as investors booked profits after hitting a two-week high the previous session. The price action suggests Wednesday’s rally, in reaction to hawkish Fed announcements, was short-covering and that prices may have to pull-back into support in order to attract the next wave of buying.

To recap Wednesday’s events, the Fed said left its benchmark interest rate unchanged, but it also announced it would start to reduce its $4.5 trillion worth of bond holdings in October. Fed Chair Janet Yellen surprised traders by saying that weak inflation is transitory and that a December rate hike is still on the table.

The dollar was primarily driven higher by a jump in U.S. Treasury yields. After the Fed announcement, interest rates futures implied traders saw a 73 percent chance the central bank would raise rates at its December 12 – 13 meeting, up from 37 percent a month earlier, according to CME Group’s FedWatch program.

In other Forex news, the USD/JPY hit a two-month high after the Bank of Japan as expected left its benchmark interest rate at minus 0.10 percent and annual bond purchases at 80 trillion Yen ($717.6 billion).

Also on Thursday, European Central Bank President Mario Draghi said monetary policy is not an appropriate tool to address financial imbalances but offered no fresh insight on the central bank’s asset purchase program.

U.S. Economic Reports

Weekly Unemployment Claims came in well under the 302K forecast at 259K. Analysts had priced in an increase from the previous week due to expected claims from areas affected by Hurricanes Harvey and Irma.

The Philly Fed Manufacturing Index jumped from 18.9 to 23.8. Investors were looking for a reading of 17.3.

The monthly Home Price Index (HPI) came in at 0.2%, below the 0.4% estimate. The Conference Board’s Leading Index was 0.4%, up from 0.3% last month and above the forecast.

Gold

December Comex gold futures hit its lowest level in nearly four weeks on Thursday with traders reacting to the sharply higher U.S. Dollar from the previous session. The tone of the market is bearish in response to a hawkish Federal Reserve.

Additional headwinds for gold over the near-term include healthcare legislation, tax reform and repatriation. All three events mean economic growth and possibly higher interest rates and a higher U.S. Dollar. These factors should put pressure on dollar-denominated gold.

Crude Oil

U.S. West Texas Intermediate and international-benchmark Brent crude oil closed mixed on Thursday with Brent posting a slight gain. Traders were bracing for Friday’s meeting of OPEC and non-OPEC producers that could extend production limits or deepen the cuts designed to trim the supply glut and stabilize prices.

Ministers from OPEC, Russia and other producing countries meet in Vienna on Friday and are due to consider extending output cuts that began in January.

Kuwaiti Oil Minister Essam al-Marzouq said on Thursday that compliance with OPEC-led oil output cuts was “very good” and above 100 percent. This supports the notion that OPEC will extend the deal, possibly to the end of next year.