Dollar Firm Ahead of CPI Data

September 13, 2023
  • August CPI data will be the highlight; Fed tightening expectations hinge crucially on today’s CPI readings; U.S. financial conditions continue to loosen; House Speaker McCarthy has started impeachment proceedings against President Biden
  • Reports emerged late yesterday that the ECB sees inflation remaining above 3% next year; eurozone reported soft July IP; U.K. reported soft July data; incoming BOE Deputy Governor Breeden sounded cautious; Poland policymakers are finally pushing back against zloty weakness; Hungary central bank minutes will be released
  • Japan Prime Minister Kishida shuffled his cabinet; Japan reported firm Q3 BSI business conditions survey; New Zealand’s Labour Party is seeing its popularity fall ahead of October 14 elections

The dollar is firm ahead of CPI data. DXY is trading higher for the second straight day near 104.747 and remains on track to test to March high near 105.883. The euro is trading lower near $1.0735 and has given back its gains from yesterday’s report on the ECB (see below). It remains on track to test the May low near $1.0635. Sterling is trading lower near $1.2460 after weaker than expected data and remains on track to test the May low near $1.2310. USD/JPY is trading higher near147.40 and remains on track to test 150. We believe the fundamental story remains in favor of the greenback. Looking through the recent noise, the U.S. remains in a much stronger position than the other major economies such as the eurozone or the U.K. Data this week should confirm our outlook and lead to ongoing dollar strength. Today’s CPI data should provide a bit of a spark.


August CPI data will be the highlight. Headline is expected at 3.6% y/y vs. 3.2% in July, while core is expected at 4.3% y/y vs. 4.7% in July. The Cleveland Fed’s Nowcast model suggests headline and core inflation of 3.8% and 4.5%, respectively. Looking ahead to September, the model suggests headline and core inflation of 3.8% and 4.3%, respectively. With headline creeping up to the 3.5-4.0% range and core stuck near 4.0%, it’s clear the Fed’s work is nowhere near done. August budget statement will also be reported and is expected at -$230.0 bln vs. -$219.6 bln in July.

Fed tightening expectations hinge crucially on today’s CPI readings. Recent mixed data suggest a skip next week is likely as WIRP suggests only 5% odds of a hike next Wednesday. More likely, we will see the next hike November 1. By that November meeting, we will get one more jobs report and two each of CPI, PPI, retail sales, and PCE. If things go the way we expect for the U.S., the current 50% odds of a hike then are too low. There are no Fed speakers this week due to the media embargo.

U.S. financial conditions continue to loosen. The Chicago Fed’s weekly financial conditions index are the loosest since early February 2022, well before the Fed started hiking rates on March 16 2022. The next weekly reading for financial conditions comes today. It’s clear that the Fed has to do more in order to rein in the red hot US economy. The Atlanta Fed's GDPNow model is now tracking Q3 growth at 5.6% SAAR. Next model update comes next tomorrow after the data.

House Speaker McCarthy has started impeachment proceedings against President Biden. He did not hold a vote because the motion would not pass, as 20-30 moderate Republicans will not support McCarthy’s decision to appease the hard right Freedom Caucus. There’s not much to add except to say that with no hope of passing, this is mere political theater.


Reports emerged late yesterday that the ECB sees inflation remaining above 3% next year. The euro rose in response but we don't really see why. The current ECB forecasts from June show both headline and core CPI at 3% for 2024 and based on current trends, we fully expected a modest increase in the inflation forecasts. Similarly, the report suggested that growth forecasts for this year and next year would be downgraded, which we also fully expected in light of the recent weakness in the real sector data. The FX market seems to agree with us, as the euro is back trading where it was before the report came out.

The report came just days before the European Central Bank decision tomorrow. The market is split; of the 64 analysts polled by Bloomberg, 34 see no change and 30 see a 25 bp hike to 4.0%. Similarly, WIRP suggest odds of a 25 bp hike stand near 65% but rise to 85% October 26 and is nearly priced in for December 14. These odds will rise and fall with the data but what’s very interesting to us is that the ECB is quite likely to stop hiking before the Fed does. If so, it would be a game-changer for the euro. The euro’s performance on ECB decision days has been mixed of late. Of the past four, the euro has ended higher twice and lower twice. Before that, it weakened four straight and seven of eight.

Eurozone reported soft July IP. It came in at -1.1% m/m vs. -0.9% expected and a revised 0.4% (was 0.5%) in June, while the y/y rate came in at -2.2% vs. -0.3% expected and a revised -1.1% (was -1.2%) in June. The data continue to worsen and we see little relief on the horizon.

U.K. reported soft July GDP, IP, services, construction, and trade data. GDP came in at -0.5% m/m vs. -0.2% expected and 0.5% in June, IP came in as expected at -0.7% m/m vs. 1.8% in June, services index came in at -0.5% m/m vs. -0.1% expected and 0.2% in June, and construction came in as expected at -0.5% m/m vs. 1.6% in June. In y/y terms, GDP slowed to 0.0% vs. 0.9% in June, IP slowed to 0.4% vs. 0.7% in June, services slowed to -0.3% vs. 0.7% in June, and construction slowed to 2.8% vs. 4.6% in June. We warned that the June bounce in the data was likely to be short-lived and today’s data confirm this.

Incoming Bank of England Deputy Governor Sarah Breeden sounded cautious. She noted that there were a lot of “mixed signals” coming from the recent data, including high wages, a looser labor market, and falling inflation. Breeden said “How those combine to help us come to a medium term judgment about what is happening to wages and pricing, that is what I will be looking at when I’m looking at interest rates in November.” She takes over from Deputy Governor Jon Cunliffe, who will retire after the September 21 BOE decision. With regards to the economy, Breeden said “We’re not forecasting a recession. It is not our intent to cause a recession, and the MPC will be very careful as it takes its decisions.” However, she admitted that “I would expect relatively flat GDP in the UK over the next couple of years, as the impact of past increases in Bank Rate increasingly push down on demand, and supply remains very weak.”

Bank of England tightening expectations have fallen sharply. WIRP suggests odds of a 25 bp hike September 21 are around 80%. For a time over the summer, a 50 bp hike was largely priced in and so the change is significant. Odds of a second 25 bp hike are around 30% November 2 and then rise to top out near 55% February 1. The first cut is still not priced in until H2 2024.

Poland policymakers are finally pushing back against zloty weakness. Pawel Borys, a senior aide to Prime Minister Morawiecki said the currency had weakened beyond the “optimal” level, which he estimated was in the 4.40-4.60 range against the euro. He added that the central bank should consider the zloty impact of future policy decisions, an acknowledgment that last week’s dovish surprise was ill-considered. Lastly, Borys stressed that “The government has instruments that have already been effective in 2022 in striving to make the exchange rate optimal.” Borys runs the government’s development fund and has been a key behind the scenes figure in setting economic policy. The swaps market is pricing in 75 bp of easing over the next three months followed by another 75 bp over the subsequent three months, which would only invite further zloty weakness.

Aggressive monetary easing has become one of the largest drags on EM FX, second perhaps only to China’s slowdown. Hungary was the first to cut aggressively, followed by Chile and they too are paying a price. Czech National Bank is next in line to cut rates, though they may be more cautious given what Poland is going through. It’s no coincidence that the worst EM performers in H2 so far are ARS (-26.6% vs. USD), CLP (-10.3%), PLN (-5.7%), HUF (-4.7%), and CZK (-4.6%). This underperformance should continue. Of note, BRL is -3.3% so far in H2 and we think it has held up relatively better because unlike the others cutting rates, Brazil actually got inflation back to the target range before easing. Peru is expected to start its easing cycle tomorrow and with inflation still well above target, PEN (-2.3% in H2 vs. USD) may start to underperform more.

Hungary central bank minutes will be released. At the August 29 meeting, the bank cut its 1-day repo rate 100 bp to 14.0% and is expected to do the same at the next meeting September 26 and will then equal the base rate. After that, both rates will likely be cut in unison, with the swaps market pricing in a rate of 11.25% in three months and 9.5% in six months. However, Deputy Governor Virag warned recently that the central bank would no longer be on “autopilot” after this month’s meeting and that further monetary easing would be “data-driven” and “cautious and gradual.”


Japan Prime Minister Kishida shuffled his cabinet. The economic team remained in place, with Finance Minister Suzuki and Economy, Trade and Industry Minister Nishimura keeping their posts. Minoru Kihara will take over as Defense Minister for his first cabinet position. Former Justice Minister Yoko Kamikawa will become Foreign Minister and is one of five women in the cabinet, which ties the previous record. We see little change in policy as a result of the shuffle.

Japan reported firm Q3 BSI business conditions survey. Business conditions for large manufacturing firms improved to 5.4 vs. -0.4 in Q2, while large all industry improved to 5.8 vs. 2.7 in Q2. This is a diffusion index and represents the quarterly change in the number of firms seeing improvement vs. those seeing deterioration. We believe that this improvement will be hard to sustain as the economy shows signs of slowing so far in Q3. August PPI was also reported and came in a tick lower than expected at 3.2% y/y vs. a revised 3.4% (was 3.6%) in July. With price pressures showing signs of leveling off, the Bank of Japan is likely to remain on hold. Next policy meeting is September 21-22 and no change is expected then.

New Zealand’s Labour Party is seeing its popularity fall ahead of October 14 elections. In the 1News/Verian poll published today, Labour support fell one percentage point to 28% while the main opposition National Party rose two percentage points to 39%. The right-wing ACT Party had 10% and the Green Party had 10% support. The Maori Party had 3%, which is below the 5% needed for parliamentary representation, while the nationalist New Zealand First Party came in right at 5% support. If these numbers hold up, National would be able to form a government with the support of ACT. One noteworthy policy plank of the National Party is changing the RBNZ’s mandate back to only targeting inflation.

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