Dollar Pullback Limited

February 05, 2025
6 min read

Dollar Pullback Limited

  • Fed is in no rush to resume easing. The January ISM services PMI takes the spotlight today.
  • ECB will publish its January wage tracker today. The Eurozone disinflationary process is well on track and argues for more ECB rate cuts.
  • Japan wage growth ran hot in December. New Zealand labor market conditions further weakened in Q4. China private sector services growth momentum slows in January. Poland central bank to keep rates steady at 5.75% today.

USD has retraced all its tariff-tantrum gains of the week and is trading on the defensive against all major currencies. Treasury yields dipped across the curve largely driven by a lower term premium as investors’ aversion to holding longer-maturity bonds eased. 10-year Treasury yields have adjusted closer to the level implied by US nominal GDP growth of roughly 4.50% after testing a high of 4.80% in mid-January.

Fed funds futures continue to imply about 50bps of total easing in 2025, with the next full 25bps cut priced-in for July. In our view, the Fed will struggle to deliver on those easing expectations which is USD supportive.

US

Indeed, the Fed is in no rush to resume easing. Fed Governor Philip Jefferson stressed overnight “I do not think we need to be in a hurry to change our stance.” Jefferson pointed out he expects the US economy to continue “to grow at a healthy pace this year” while noting the labor market is “in a solid position” and inflation “remains above our 2 percent objective.”

Fed speakers today include: Richmond Fed President Tom Barkin (non FOMC voter) (12:30pm and 2:00pm London), Chicago Fed President Austan Goolsbee (FOMC voter) (7:30pm London), and Fed Governor Michelle Bowman (8:00pm London).

The US JOLTS December data was mixed but still consistent with a healthy labor market. Job openings in December fell more than expected to a three-month low at 7600k (consensus: 8000k) vs. 8156k in November (revised up from 8098k). Nevertheless, the ratio of job openings to unemployed remained at 1.1 for a six straight month which is historically pretty strong. The Job opening rate dropped 0.4pts to 4.5% but remains at a level that should keep the unemployment rate quite low in historical terms. The layoff rate remained steady at 1.1% for a fourth consecutive month suggesting there is no layoff spiral underway while the quit and hiring rates were unchanged at 2.0% and 3.4%, respectively.

Today, the ADP January employment data (1:15pm London) will give a timelier read on the labor market ahead of Friday’s policy-relevant non-farm payrolls report. ADP employment is projected to rise 150k in January vs. 122k in December. Meanwhile, consensus is for non-farm payrolls to increase 170k in January vs. 256k in December. For reference, payroll job gains averaged 170k per month over the past three months.

The January ISM services PMI is today’s focus (3:00pm London). Headline is projected at 54.0 vs. 54.0 in December. The regional Fed ISM services prints point to downside risk. Of note, the US S&P Global services PMI fell to a 9-month low at 52.8 vs. 56.8 in December.

EUROZONE

EUR/USD is firmer near 1.0400 after undershooting 1.0200 on Monday. ECB will publish its January wage tracker today (9:00am London). In December, the ECB wage tracker pointed to negotiated wage pressures easing to 3.2% in 2025 compared with 4.7% in 2024 suggesting the disinflationary process in the Eurozone is well on track. Markets imply an additional 100 to 125bps of ECB policy rate cuts over the next 12 months. Bottom line: EU-US 2-year bond yield spreads can further weigh on EUR/USD.


JAPAN

JPY is outperforming and 10-year JGB yields edged up to almost 1.30%, highest level since April 2011. Japan wage growth ran hot in December. Nominal cash earnings came in 1.1pts higher than expected at near a three-decade high of 4.8% y/y vs. 3.9% in November (revised up from 3.0%) reflecting a jump in bonuses.

The less volatile scheduled pay growth for full-time workers matched consensus at 2.8% y/y vs. 2.7% y/y in November and is down from a series high of 3% in July 2024. This is consistent with the Bank of Japan (BOJ) projection for inflation to stabilize around its 2% target in 2026 assuming productivity growth of 1%. Bottom line: the BOJ policy rate is still expected to peak around 1.00% over the next two years which curtails upside for JPY and JGB yields.

NEW ZEALAND

NZD/USD is consolidating recent gains triggered by broad USD weakness. New Zealand labor market conditions further weakened in Q4, largely matching expectations. The unemployment rate rose three ticks to a four-year high at 5.1% (consensus & RBNZ: 5.1%). Employment dipped -0.1% q/q (consensus: -0.2%, RBNZ: -0.3%) vs. -0.6% in Q3 (revised down from -0.5%). Private sector wages grew 0.6% q/q (consensus: 0.6%, RBNZ: 0.5%) vs. 0.6% in Q3.

In line with RBNZ guidance, markets continue to imply another 50bps rate cut to 3.75% at the February 19 meeting and the policy rate to through around 3.00% over the next 12 months. Bottom line: NZ-US 2-year bond yield spreads can further weigh on NZD/USD.

CHINA

USD/CNH is heavy near 7.2700. China’s private sector services growth traction unexpectedly slowed in January. The Caixin services PMI fell to a four-month low at 51.0 (consensus: 52.4) vs. 52.2 in December. Earlier this week, the Caixin January manufacturing PMI showed the factory sector at a virtual standstill. China’s steady drip feed of stimulus has done little to improve the economy’s medium-term outlook, which we believe hinges crucially on boosting consumption spending. Until that has been accomplished, growth will remain well below expectations and a structural drag for CNH.

POLAND

National Bank of Poland (NBP) meets today and is expected to keep rates steady at 5.75%. At its 15-16 January meeting, NBP left the policy rate at 5.75% and reiterated that “the current level of the NBP interest rates is conducive to meeting the NBP inflation target in the medium term.” NBP also warned again that “in the coming quarters inflation will remain markedly above the NBP inflation target”, signaling no rush to start easing. In fact, Governor Glapinski stressed that policy rate cut discussion must be delayed for some time, adding “we as a central bank can’t ignore when inflation is double the target and forecasts don’t show it’s trending toward the target.” The swaps market is pricing in about 50% probability of a 25bps cut in the next three months. A 25bps cut is fully priced-in over the next six months followed by an additional 50bps of easing over the subsequent six months. Minutes of the January NBP meeting are due Friday.



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