Dollar Flat as U.S. Returns from Holiday

July 05, 2023
  • The markets finally believe the Fed; FOMC minutes will be important; we get only minor data today as ADP was delayed due to the holiday; Brazil’s central bank is tilting more dovish with two new appointments by Lula
  • The eurozone reported soft final June services and composite PMIs; individual eurozone countries also reported some key data; eurozone inflation expectations continue to fall; Turkey reported June CPI
  • Japan and Australia reported soft final June services and composite PMIs; RBA kept rates steady at 4.10%, as expected; Caixin also reported soft June services and composite PMIs

The dollar is holding steady as the U.S. returns from holiday. DXY is trading flat near 103.045 after two straight up days as the recent rise in U.S. yields takes a breather. The euro is trading higher near $1.0885 while sterling is trading flat near $1.27. USD/JPY has been unable to break above last Friday’s new cycle high just above 145 and is currently trading near 144.35. With the BOJ on hold for now, this pair should continue to march higher. With markets now starting to increasingly price in that second Fed hike this year (see below), 2-year differentials continue to move in the dollar’s direction and further gains are likely. Jobs data this Friday will be key to this repricing, though we will get plenty of other important U.S. data ahead of that.


The markets finally believe the Fed. At least for now. A 25 bp hike in July is nearly priced in while the odds of another 25 bp hike after that have risen to around 35%. If the U.S. data continue to come in strong this week, those odds should rise further. Furthermore, Fed easing has been pushed out to next June. Simply put, the market is finally starting to believe the Fed’s “higher for longer” message. The 2-year interest rate differentials continue to move in the dollar’s favor but the data this week will be key for an extension of this rally.

FOMC minutes will be important. Recall that the Fed decided to skip at the June 13-14 FOMC but signaled further tightening ahead with the hawkish shift in the Dot Plots. This was a very mixed message and the minutes will be scoured for what sort of compromise was struck and also for clues on what might trigger a pause rather than a skip. Since the June decision, retail sales have come in strong and weekly claims data suggest the labor market remains tight. PCE readings show inflation easing, albeit slowly. This week’s data will be very important for the July decision, though CPI and PPI next week and retail sales the week after will also be key inputs for Fed policy. Barring a complete collapse in the economy, however, it’s hard to make a case against a 25 bp hike at the July 25-26 meeting. Williams speaks today.

We get only minor data today as ADP was delayed until tomorrow due to the holiday. May factory orders will be reported and are expected at 0.8% m/m vs. 0.4% in April. June vehicle sales will also be reported and are expected at a 15.40 mln annual rate vs.5.05 mln in May. If so, it would suggest consumption remains robust. Of note, the Atlanta Fed's GDPNow model is currently tracking 1.9% SAAR for Q2, down from 2.2% previously. Next model update comes tomorrow. It’s worth noting that after the upward revision in Q1 GDP growth to 2.0% SAAR, the economy has grown four straight quarters around or above trend at a time when the Fed wants below trend growth to bring down inflation.

Brazil’s central bank is tilting more dovish with two new appointments by Lula. Deputy Finance Minister Gabriel Galipolo said during his Senate confirmation hearing that “Central bank autonomy is often understood as if it were autonomy from the democratic process, or as if someone wanted to be nominated to be the director of the central bank to do something in spite of what came from the democratic will. It is necessary to understand that it is obvious that it is the democratically elected power, the will of the ballot box, that determines the economic destiny of our society.” Actually, it sounds to us as if Galipolo is the one that misunderstands what central bank autonomy really means. Galipolo should be viewed as Finance Minister Haddad’s proxy on the central bank board of directors. Indeed, some believe Galipolo is the likely replacement for current central bank President Campos Neto when his term ends December 2024. The Senate voted overwhelmingly to appoint both Galipolo and Ailton Aquino to the board. As things stand, the bank is already on the cusp of cutting rates, with a 50 bp cut expected at the next meeting August 2. The market is pricing in 75 bp of easing over the next three months followed by another 125 bp of easing over the subsequent three months.


The eurozone reported soft final June services and composite PMIs. Both headline services and composite PMIs fell four ticks from the preliminary to 52.0 and 49.9, respectively. This was the first sub-50 reading for the composite since December and confirms our view that the eurozone is slipping into recession. Looking at the country composite readings, Germany fell two ticks from the preliminary to 50.6 and France fell one tick to 47.2. Italy and Spain reported for the first time and their composites came in at 49.7 and 52.6, respectively. Both fell more than two full points from May. Italy has joined France below the key 50 boom-bust line and it’s only a matter of time before other nations do as well.

Individual eurozone countries also reported some key data. France and Spain reported May IP. France came in at 1.2% m/m vs. 0.6% expected and 0.8% in April, while Spain came in at 0.6% m/m vs. 0.4% expected and a revised -1.9% (was -1.8%) in April. The y/y rates improved modestly the weak June PMI readings suggest little to get excited about in terms of the eurozone economic outlook. Germany reports May factory orders tomorrow and IP Friday, while eurozone IP will be reported July 13.

Eurozone inflation expectations continue to fall. The monthly ECB survey showed inflation expectations for the next 12 months fell to 3.9% in May vs. 4.1% in April and 5.0% in March. For three years ahead, inflation expectations remained steady at 2.5% vs. 2.9% in March. The ECB will be happy to see the drop and should allow the doves to retain control of the narrative at the July 27 meeting. WIRP suggests odds of a 25 bp hike are near 90% this month. Odds of another 25 bp hike stand near 55% September 14, rise to nearly 80% October 26, and is nearly priced in December 14. After that, no more hikes are priced in. This is noteworthy as it appears the market believes the doves even though core inflation remains uncomfortably high. May PPI came in at 1.5% y/y vs. -1.3% expected and revised 0.9% (was 1.0%) in April. This was the first y/y drop since December 2020 and bodes well for CPI ahead.

Turkey reported June CPI. Headline came in at 38.21% y/y vs. 38.85% expected and 39.59% in May, while core came in at 47.33% y/y vs. 47.60% expected and 46.62% in May. Headline is the lowest since December 2021 but still way above the 3-7% target range. At the last policy meeting June 22, the central bank under new Governor Hafize Gaye Erkan hiked rates 650 bp to 15.0% vs. 1150 bp expected. This hike was very disappointing to those looking for a bigger dose of orthodoxy, even though it was accompanied by a pledge to continue hiking rates gradually. The next meeting is July 20 and much will depend on the lira and the data. State banks have been supporting the lira in recent days but this cannot be sustained for long. If and when lira weakness resumes, the central bank may be forced to deliver much larger hikes. The swaps market is pricing in 775 bp of tightening over the next three months followed by another 275 bp over the subsequent three months that would take the policy rate up to a peak of 25.50%. With inflation still running near 40%, that would not be enough tightening to bring down inflation and stabilize the lira.


Japan reported soft final June services and composite PMIs. Services came in at 54.0 vs. 54.2 preliminary, while the composite came in at 52.1 vs. 52.3 preliminary. This was the lowest composite reading since February and confirms our view that the economy is losing momentum. No wonder policymakers here are so concerned about removing accommodation too early. WIRP suggests odds of liftoff are less than 10% for the July 27-28 BOJ meeting and rise slowly to less than 50% for December 18-19.

Reserve Bank of Australia kept rates steady at 4.10%, as expected. However, the market was split as nearly half the analysts polled by Bloomberg see a 25 bp hike to 4.35%. It was a hawkish hold as the bank noted “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve. The decision to hold interest rates steady this month provides the Board with more time to assess the state of the economy and the economic outlook and associated risks.” After the pause, RBA tightening expectations were pushed out slightly. WIRP suggests 45% odds of a 25 bp hike August 1 and rise to 85% September 5 and is fully priced in October 3. Looking ahead, odds of another 25 bp hike after that top out near 55% in December. Updated macro forecasts will be released at the August 1 meeting.

Australia reported soft final June services and composite PMIs. Services came in at 50.3 vs. 50.7 preliminary, while the composite came in at 50.1 vs. 50.5 preliminary. This was the lowest composite reading since March and is getting very close to the key 50 boom/bust level. Indeed, it’s only a matter of time before it falls below 50 and yet the RBA is showing no signs of pausing again.

Caixin reported soft June services and composite PMIs. Services came in at 53.9 vs. 56.2 expected and 57.1 in May, which dragged the composite PMI down to 52.5 vs. 55.6 in May. This was the lowest Caixin composite reading since January. Last week, official PMIs also softened. Manufacturing came in as expected at 49.0 vs.48.8 in May, while non-manufacturing came in at 53.2 vs. 53.5 expected and 54.5 in May. As a result, the composite fell to 52.3 vs. 52.9 in May and was the third straight monthly drop to the lowest since December. Of note, the Caixin readings had been running much higher than the official ones in recent months but June was all about playing catch-up. Either way, there is clearly a loss of momentum in the economy and will bring forth more calls for stimulus in H2.

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