Dollar Continues to Gain After FOMC Decision

September 21, 2023
  • U.S. yields are on the rise after the FOMC decision; the two-day FOMC meeting ended with a hawkish hold, as expected; Powell stayed on message at the press conference; weekly jobless claims will be of interest; Brazil cut rates 50 bp to 12.75%, as expected
  • BOE meeting ends with a decision shortly; some ECB hawks remain vocal; SNB unexpectedly kept rates steady at 1.75%; Norway and Sweden hiked rates 25 bp, as expected; SARB is expected to keep rates steady at 8.25%; Turkey is expected to hike rates 500 bp to 30.0%
  • Japan Prime Minister Kishida will unveil a series of economic support measures early next week; BOJ meeting started today ends with a decision tomorrow; New Zealand reported firm Q2 GDP data; Taiwan, Indonesia, and Philippines all kept rates steady, as expected

The dollar continues gain after the hawkish hold by the Fed. DXY posted an outside up day yesterday that points to further gains. It traded at a new cycle high near 105.687 and is on track to test the March high near 105.883. The euro posted an outside down day yesterday and tested last week’s low near $1.0630. Clean break below sets up a test of the March low near $1.0515. Sterling broke below the May low near $1.2310 and traded as low as $1.2280. This sets up a test of the March low near $1.1805. USD/JPY traded at a new cycle high near 148.45 and remains on track to test 150. The fundamental story remains in favor of the greenback as the U.S. economy is in a much stronger position than the other major economies such as the eurozone or the U.K. Indeed, the worsening outlook in Europe led the ECB to deliver a dovish message last week and we believe the BOE will follow suit today. With firm U.S. data and a hawkish Fed, this should feed into further dollar strength.


U.S. yields are on the rise after the FOMC decision. The 10-year yield traded near 4.45%, the highest since November 2007. The June 2007 high near 5.32% is the next major chart point. Elsewhere, the 30-year yield traded near 4.49%, breaking above the 4.47% cycle high in August. The next target is the February 2011 high near 4.79% and the March 2010 high near 4.80%. The short end is also participating in this move higher, as the 2-year yield traded near 5.20%, the highest since July 2006 and nearing a test of the June 2006 high near 5.28%. The real U.S. 10-year yield broke above 2% to trade near 2.07%, a level it hasn’t seen since February 2009.

The two-day FOMC meeting ended with a hawkish hold, as expected. The Fed noted that “Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have slowed in recent months but remain strong, and the unemployment rate has remained low. Inflation remains elevated.” Similar to its July statement, it said that “In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.” The vote was unanimous.

The Dot Plots shifted more hawkish. As we expected, the Dot Plots were unchanged for end-2023 and still imply one more hike this year. However, we got a hawkish shift for end-2024 and end-2025 to 5.125% and 3.875% vs. 4.625% and 3.375% seen in June, respectively. What’s more, the fact that the Dot Plots are for year-end rates masks the possibility that the Fed hikes a second time in early 2024 and then cut three times by end-2024 to end up at 5.125%. Fed Funds futures are pricing in an end-2024 rate of 4.765% and an end-2025 rate of 4.305%. There were upward revisions to the growth forecasts and downward revisions to the unemployment forecasts, but the inflation forecasts were largely unchanged. 2026 was added to the forecast horizon.

Powell stayed on message at the press conference. He said that holding rates doesn’t mean the Fed is done. He said that “we’re fairly close to where we need to get but the Fed wants to see “convincing evidence” that the appropriate rate has been reached. Powell noted that the last jobs report is a good example of what the Fed wants to see but needs to see more progress. He stressed that the Fed would know sufficiently restrictive policy when it sees it. He gave no forward guidance and stressed that each decisions will depend on the totality of the data and that the Fed is never intending to send a signal about timing.

We give Powell an A for effort. He did not stray from the hawkish message, did not give any dovish hints, and prepared the market for a likely hike in November. Of note, the weekly Chicago Fed financial conditions were released yesterday and showed further loosening through last Friday to the loosest since late February 2022. WIRP suggests 30% odds of a hike in November and 50% in December, which are way too low in our view. Of note, the first cut has been pushed out to July 31 from June 12 before the decision, so the new Dot Plots did have an impact. By that November meeting, we will get one more each of the jobs report, CPI, PPI, and retail sales as well as two PCE readings.

If things go the way we expect for the U.S. economy, the current 30% odds of a hike then are way too low. When all is said and done, headline inflation is creeping up towards 4% while core remains stuck near 4%. The economy is still growing above trend and the labor market remains extremely tight. Simply put, current conditions warrant further tightening, period.

Regional Fed manufacturing surveys for September will continue rolling out. Philly Fed manufacturing index is expected at -1.0 vs. 12.0 in August. Last week, the Empire manufacturing survey came in at 1.9 vs. -10.0 expected and -19.0 in August. Q2 current account data and August leading index will also be reported.

Housing data will hold some interest. Existing home sales are expected at 0.7% m/m vs. -2.2% in July. Other housing data reported earlier this week have come in largely weaker than expected. September NAHB housing came in at 45 vs. 49 expected and 50 in August, while August building permits came in at 6.9% m/m vs. -0.2% expected and 0.1% in July and housing starts came in at -11.3% m/m vs. -0.9% expected and a revised 2.0% (was 3.9%) in July.

Weekly jobless claims will be of interest. That’s because initial claims are for the BLS week containing the 12th of the month, and are expected at 225k vs. 220k last week. Continuing claims are reported with a one-week lag and so next week’s reading will be for the BLS survey week. These are expected at 1.692 mln vs. 1.688 mln last week. Bloomberg consensus for NFP has started out at 155k, while its whisper number is currently at 171k. Our understanding is that because the striking workers were still on payroll when the survey week began, September jobs data should not be impacted. Bloomberg consensus for NFP stands at 150k currently while its whisper number stands at 171k.

Brazil COPOM cut rates 50 bp to 12.75%, as expected. It signaled further easing and noted “Committee members unanimously anticipate further reductions of the same magnitude in the next meetings. This pace is appropriate to keep the necessary contractionary monetary policy for the disinflationary process.” Next meetings are November 2 and December 13, which implies a year-end rate of 11.75%. The swaps market is also pricing in 50 bp cuts at the January 31 and March 20 meetings.


Bank of England meeting ends with a decision shortly. It’s a toss-up. Either it hikes 25 bp and signals a pause or it skips and signals one last hike in November. Either outcome would be negative for sterling, in our view. We fully expect a dovish message from the BOE, similar to what we got from the ECB last week. Let’s face it, the U.K. is facing the same stagflation risks as the eurozone and policymakers there are in the same bind. WIRP suggests odds of a 25 bp hike today are around 55%, rising to 85% November 2 and nearly priced in for December 14. For a time over the summer, a 50 bp hike today was largely priced in and so the change is noteworthy. There are no longer any odds of a second 25 bp hike and so the policy rate is seen peaking at 5.5%. However, the first cut is still not priced in until H2 2024. Updated macro forecasts won’t come until the November 2 meeting.

Some ECB hawks remain vocal. Nagel asked “Have we reached the plateau? This cannot yet be clearly predicted. The inflation rate is still too high. And the forecasts still only show a slow decline toward the target level of 2%.” Elsewhere, Makhlouf said “I’m not saying that at our next meeting we’re going to hold” but then added “If inflation stays the same, it doesn’t necessarily mean that interest rates will go up. They could just stay where they are for longer.” Schnabel and Lane also speak today. Despite some hawkish holdouts, we think the discussion at the ECB has now shifted from how high to how long. WIRP suggests less than 10% odds of a hike October 26, then rising to top out near 30% December 14. The first cut is still seen around mid-2024.

Swiss National Bank unexpectedly kept rates steady at 1.75%. A 25 bp hike was expected, though as handful of analysts saw no change and WIRP suggested odds of a hike around 67%. The bank said that "From today's perspective, it cannot be ruled out that a further tightening of monetary policy may become necessary to ensure price stability over the medium term.” President Jordan said the battle against inflation is not yet over and that the bank is closely monitoring second round effects, but added that “we could afford to take a break from hikes.” WIRP suggests 40% odds of a hike in December and rising to near 60% for both March and June. Since the last policy meeting June 22, the Swiss franc had gained nearly 3.5% vs. the euro, which helped push inflation down. However, EUR/CHF has given up nearly half those gains just this past week and if this continues, it may push inflation higher and have an impact on SNB policy. Indeed, Jordan said the bank is ready to sell FX. Stay tuned.

Norges Bank hiked rates 25 bp to 4.25%, as expected. Governor Bache said “There will likely be one additional policy rate hike, most probably in December” and added that “There will likely be a need to maintain a tight stance for some time ahead.” The growth forecasts saw minor tweaks, while the inflation and policy rate forecasts were revised up significantly to underscore Governor Bache’s hawkish stance. The swaps market is not pricing in any more hikes but for now, we take Norges Bank at its word and look for a skip at the November 2 meeting followed by a hike at the December 14 meeting.

Riksbank hiked rates 25 bp to 4.0%, as expected. It said rates could be raised further but the expected rate path was little changed. It now sees the policy rate peaking at 4.10% in Q3 2024 vs. 4.05% in Q2 2024 in the June forecasts, which implies less than 50% odds of one last hike this year. WIRP reflects this and shows only 30% of a hike at the November 23 meeting. The bank announced it will hold eight meetings a year going forward vs. five currently. Most interesting was the announcement that the bank would start hedging part of its FX reserves on September 25. It said the hedging would be completed in 4-6 months and is meant to limit losses if the krona appreciates. Governor Thedeen said there was a high probability of more rate hikes. He speaks twice tomorrow.

South African Reserve Bank is expected to keep rates steady at 8.25%. At the last policy meeting July 20, the bank delivered a dovish surprise and kept rates steady at 8.25% vs. an expected 25 bp hike to 8.5%. The vote was 3-2 with the dissents in favor of a hike. Governor Kganyago warned that “Risk to the inflation outlook are assessed to the upside” and added that “It is not the end of the hiking cycle, it depends on the data and risk. That is what it boils down to.” With inflation sharply back into the 3-6% target range, we believe the tightening cycle is over. That said, the swaps market is pricing in steady rates over the next twelve months followed by 50 bp of easing over the subsequent twelve months.

Turkey central bank is expected to hike rates 500 bp to 30.0%. However, markets are all over the place. Of the 21 analysts polled by Bloomberg, 5 look for a 250 bp hike, 14 look for 500 bp, and 2 look for a 600 bp. At the last meeting August 24, the bank delivered a hawkish surprise and hiked rates 750 bp to 25.0% vs. 250 bp expected. The swaps market is pricing in a peak policy rate of 36.0% over the next six months followed by the start of an easing cycle over the subsequent six months. If so, this would be nowhere near enough tightening to get inflation back to target and stabilize the lira.


Japan Prime Minister Kishida will unveil a series of economic support measures early next week. He warned that “We are at a crucial point that will decide whether Japan’s economy can move on to a new stage.” Kishida will reportedly ask for an extraordinary budget to fund these measures in October, which include a pledge to extend energy subsidies expiring this month as well as measures to boost pay and investment. Kishida is struggling at the polls and has already shuffled his cabinet.

Two-day Bank of Japan meeting started today ends with a decision tomorrow. No change is expected, especially after reports emerged last week that BOJ policymakers were concerned with how markets took Governor Ueda’s recent comments. Rather than signaling an imminent change as markets heard, BOJ officials felt that his comments indicated little change in the bank’s existing policy stance and we concur. As we pointed out last week, Ueda did not say he thinks wages will rise enough to warrant tightening, just that the bank will know more by year-end. Furthermore, it seems that this is the wrong time to tightening if Kishida is worried about the economic outlook. Updated macro forecasts won’t come until the October 30-31 meeting.

New Zealand reported firm Q2 GDP data. Growth came in at 0.9% q/q vs. 0.4% expected and a revised 0.0% (was -0.1%) in Q1, while the y/y rate came in at 1.8% vs. 1.2% expected and 2.2% in Q1. This was the first quarter of growth since Q3 2022 but the Q1 revision means there was only one quarter of contraction with -0.5% q/q in Q4 2022. Next RBNZ meeting is October 4 and WIRP suggests 15% odds of a hike. Those odds rise to 50% November 29 and continue rising to fully priced in for April 10.

Taiwan central bank kept rates steady at 1.875%, as expected. It revised down its 2023 growth forecast to 1.46% vs. 1.72% previously and its inflation forecast to 2.22% vs. 2.24% previously. The bank noted that the economy has been weaker than expected this year and will continue monitoring downside risks in mainland China. Governor Yang said some board member express concerns about inflation and that the policy rate will be kept in a higher range for longer. He added that rates would be kept high even if inflation falls below 2%. The central bank does not have an explicit inflation target and we believe the tightening cycle has ended. The market is pricing in steady rates over the next three years.

Bank Indonesia kept rates steady at 5.75%, as expected. The bank sees room to assess its interest rate policy going forward but will continue to focus on rupiah stabilization. Governor Warjiyo said “If we only took into account domestic economic considerations including inflation which is low and will continue to be low, of course there is room to review BI’s interest rate policy.” However he added that “The problem is that the global economy is very uncertain, especially now that the dollar is getting stronger. That’s why we stated that the interest rate policy focuses on stabilizing the rupiah exchange rate.” Bloomberg consensus sees the start of an easing cycle in Q1 with a 25 bp cut followed by 25 bp cuts in Q2 and Q3. This seems too aggressive; with the Fed expected to maintain tight policy, we believe that Bank Indonesia has very little cushion to cut rates without weighing on the rupiah.

Philippine central bank kept rates steady at 6.25%, as expected. It was a hawkish hold, as Governor Remolona warned “A rate hike is on the table for November. How big it will be will depend on the data. We’re ready to raise if the supply shocks are significant enough.” He added “So if we raise in November, then I expect rates to stay at that level for the early part of next year.” Next policy meeting is November 16. Before that, September and October CPI will have been reported and will help determine that decision. Inflation accelerated in August for the first time since January and moved further away from the 2-4% target range. The swaps market is not pricing in more hikes but it is clearly data dependent.

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