Dollar Steady Ahead of BOE Decision

August 05, 2021
  • We got further confirmation that the FOMC is tilting more hawkish; U.S. Treasury quarterly refunding announcement came in as expected; ISM reported strong July services PMI but ADP jobs report suggests some caution is warranted; Brazil COPOM hiked rates 100 bp to 5.25%, as expected
  • BOE decision is due out shortly; new macro forecasts will be released and could hold some clues about policy; eurozone reported firm economic data; Czech National Bank is expected to hike rates 25 bp to 0.75%.
  • Australia reported June trade data; political uncertainty is picking up in Malaysia

The dollar is steady ahead of the BOE decision. DXY recorded an outside up day yesterday and built on that today to trade at the highest level since July 28 near 92.35. The euro recorded an outside down day yesterday and remains heavy just below $1.1850, while sterling has held up slightly better and is trading just above $1.39. As such, the EUR/GBP cross is trading at recent lows around .8500. USD/JPY broke below the key 109.05 yesterday, only to reverse higher to post an outside up day and traded near 109.75 today. We remain positive on the dollar, as stronger U.S. data and hawkish Fed comments are clearly taking hold (see below).


We got further confirmation that the FOMC is tilting more hawkish. Last Friday, it was Bullard. Early this week, it was Waller. Yesterday, it was Vice Chair Clarida as he said “If my baseline outlook does materialize, then I could certainly see supporting announcing a reduction in our purchases later this year.” He said tapering talks will continue in the coming meetings and added that under his baseline, the “necessary conditions for raising the target range for the federal funds rate will have been met by year-end 2022.” Lastly, Clarida said that risks to his inflation outlook are to the upside.

Clarida up until now has tilted very dovish and so his comments are significant. He rarely dissents from Powell and so we view this as a sign that the Fed Chair is also moving in this direction. Furthermore, Kaplan said “As long as we continue to make progress in July (jobs) numbers and in August jobs numbers, I think we’d be better off to start adjusting these purchases soon.” For those keeping score at home, we now have Bullard, Waller, Clarida, Kaplan, and Evans pretty much on board with tapering in 2021 and rate hikes by late 2022 or early 2023. More Fed officials will likely move into this came in the coming weeks, though this is of course data-dependent. Today, Waller and Kashkari speak and will likely offer contrasting views on policy.

The U.S. Treasury quarterly refunding announcement came in as expected. It will sell a total of $126 bln of long-term securities next week, consisting of $58 bln of 3-year notes Tuesday, $41 bln of 10-year notes Wednesday, and $27 bln of 30-year bonds Thursday, all unchanged from May. The auctions will raise $67.4 bln in new cash, though Treasury noted that “Continuing current issuance sizes and patterns may provide more borrowing capacity than is needed to address borrowing needs over the intermediate-to-long term” and expects to announce a reduction in auction sizes as soon as November.

The Treasury also reiterated Treasury Secretary Yellen’s recent warning about the debt ceiling. It acknowledged that it faces “considerable uncertainty” about how long it can delay a default through special accounting measures after the federal debt ceiling was reinstated this past Sunday. Treasury said it couldn’t provide a “specific estimate of how long extraordinary measures will last.”

ISM reported strong July services PMI. The headline reading rose to a record high 64.1 vs. 60.5 expected. The components were strong across the board, with employment rising to 53.8 vs. 49.3 in June. Prices paid rose to 82.3 vs. 79.5 in June, the highest since 2005. Sustained readings above 60 are rare for all these PMIs, and yet here we are with five straight months of services above 60. Recall that July ISM manufacturing fell in July to 59.5 from 60.6 in June even as the employment component recovered to 52.9 from 49.9 in June. All of these PMI readings remain at historically high levels, signifying continued strength in the U.S. economy.

ADP jobs report suggests some caution is warranted, however. ADP came in at 330k vs. 690k and a revised 680k (was 692k) in June. The major clues are now in for Friday jobs report, with consensus at 870k jobs added vs. 850k in June. Keep an eye on hourly average earnings, which are expected to pick up to 3.9% y/y vs. 3.6% in June. Weekly jobless claims will be reported today, with initial claims expected at 383k vs. 400k the previous week and continuing claims expected at 3.255 mln vs. 3.269 mln the previous week. Claims data have been erratic lately, increasing the risk of a big NFP miss on Friday. June trade data and July Challenger job cuts will also be reported today, while Canada reports June trade data.

Brazil COPOM hiked rates 100 bp to 5.25%, as expected. it also flagged a hike of similar magnitude at the next meeting September 22. Bloomberg consensus sees the policy rate peaking at 6.75% by end-2021. However, there are clear upside risks as inflation continues to accelerate to 8.59% y/y in mid-July, well above the 2.25-5.25% target range. Elsewhere, the fiscal outlook remains cloudy after President Bolsonaro pledged to increase the Bolsa Familia social program by at least 50%. This also argues for tighter monetary policy ahead.


Bank of England decision is due out shortly. We expect a dovish hold, as uncertainty over the recent reopening and the end of the job furlough program next month warrants some caution. However, the U.K. economy is faring well and so there is some risk that Saunders and Ramsden dissent to end QE early given their recent comments. At the last decision June 24, the bank delivered a dovish hold. While no one was expecting any policy changes after it announced the start of tapering at the previous decision May 5, the dovish tone took many by surprise. The bank warned against “premature tightening” due to its view that the spike in inflation is temporary, noting that “Financial market measures of inflation expectations suggest that the near-term strength in inflation is expected to be transitory.” The bank reiterated that it does not intend to hike rates until inflation has risen above the 2% target for a sustained period. We believe this forward guidance will be maintained as it would be surprising to see yet another about-face from the BOE at this meeting.

New macro forecasts will be released and could hold some clues about policy. The previous inflation forecasts from May were 2.5% in 2021, 2.0% in 2022, and 2.0% in 2023, while the previous GDP growth forecasts were 7.25% in 2021, 5.75% in 2022, and 1.25% in 2023. If the bank increases these forecasts significantly, it would imply that inflation is not as transitory as it previously thought and that tightening could come even earlier than expected. As it is, the short sterling futures strip suggests some odds of the first hike in Q4 2021, rising significantly in Q1 and fully priced in by Q2 2022.

Eurozone reported firm economic data. German June factory orders rose 4.1% m/m vs. 2.0% expected and a revised -3.2% (was -3.7%) in May. Elsewhere, French June IP rose 0.5% m/m, as expected and up from a revised -0.4% (was -0.3%) in May. Germany (0.6% m/m expected), Spain (0.5% m/m expected), and Italy (1.0% m/m expected) report IP tomorrow but the headline eurozone reading won’t come out until August 12.

Czech National Bank is expected to hike rates 25 bp to 0.75%. Inflation eased a tick to 2.8% y/y in June, the lowest since March and further within the 1-3% target band, while Q2 GDP growth disappointed at only 0.6% q/q. Yet officials seem willing to go ahead with an aggressive tightening cycle. Deputy Governor Nidetzky backs a hike this week and “can imagine” hikes at each subsequent policy meeting until new factors emerge. Bloomberg consensus sees a policy rate of 0.75% at year-end, 1.0% by mid-2022 and 1.50% by end-2022, which seems too dovish a path in light of the more hawkish central bank comments.


Australia reported June trade data. Exports rose 4% m/m vs. 6% expected and a revised 4% Was 6%) in May, while imports rose 1% vs. 4% expected and 3% in May. As a result, the trade surplus widened to a record high AUD10.5 bln. Exports to China rose 8.2%, driven mostly by iron ore. Iron ore exports rose 6.2% and coal exports jumped 15.5%. July and August exports are likely to show some weakness, however, as iron ore prices are down nearly 25% from the late June peak. Strength in the external sector is welcome as domestic activity is taking a hit from the lockdowns. Melbourne just announced a 7-day lockdown due to rising infections, putting nearly two thirds of the nation’s population under lockdown.

Political uncertainty is picking up in Malaysia. Prime Minister Muhyiddin lost the support of UMNO, the largest party in the ruling National Front. However, he refused to step down and claims to still have enough support to win a vote of confidence, which he set for next month. At this point, it’s unclear how many UMNO members will vote against Muhyiddin, as he claims only 8 have committed to support a no confidence motion. UMNO officials said that number has grown. Of the 220 seats in parliament, UMNO holds 38 but we know that it is split on Muhyiddin. How big that split is will be crucial, as popular discontent is rising along with the widening pandemic.

Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2021. All rights reserved.

As of June 15, 2022 Internet Explorer 11 is not supported by

Important Information for Non-U.S. Residents

You are required to read the following important information, which, in conjunction with the Terms and Conditions, governs your use of this website. Your use of this website and its contents constitute your acceptance of this information and those Terms and Conditions. If you do not agree with this information and the Terms and Conditions, you should immediately cease use of this website. The contents of this website have not been prepared for the benefit of investors outside of the United States. This website is not intended as a solicitation of the purchase or sale of any security or other financial instrument or any investment management services for any investor who resides in a jurisdiction other than the United States1. As a general matter, Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) is not licensed or registered to solicit prospective investors and offer investment advisory services in jurisdictions outside of the United States. The information on this website is not intended to be distributed to, directed at or used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Persons in respect of whom such prohibitions apply must not access the website.  Under certain circumstances, BBH may provide services to investors located outside of the United States in accordance with applicable law. The conditions under which such services may be provided will be analyzed on a case-by-case basis by BBH. BBH will only accept investors from such jurisdictions or countries where it has made a determination that such an arrangement or relationship is permissible under the laws of that jurisdiction or country. The existence of this website is not intended to be a substitute for the type of analysis described above and is not intended as a solicitation of or recommendation to any prospective investor, including those located outside of the United States. Certain BBH products or services may not be available in certain jurisdictions. By choosing to access this website from any location other than the United States, you accept full responsibility for compliance with all local laws. The website contains content that has been obtained from sources that BBH believes to be reliable as of the date presented; however, BBH cannot guarantee the accuracy of such content, assure its completeness, or warrant that such information will not be changed. The content contained herein is current as of the date of issuance and is subject to change without notice. The website’s content does not constitute investment advice and should not be used as the basis for any investment decision. There is no guarantee that any investment objectives, expectations, targets described in this website or the  performance or profitability of any investment will be achieved. You understand that investing in securities and other financial instruments involves risks that may affect the value of the securities and may result in losses, including the potential loss of the principal invested, and you assume and are able to bear all such risks.  In no event shall BBH or any other affiliated party be liable for any direct, incidental, special, consequential, indirect, lost profits, loss of business or data, or punitive damages arising out of your use of this website. By clicking accept, you confirm that you accept  to the above Important Information along with Terms and Conditions.

1BBH sponsors UCITS Funds registered in Luxembourg, in certain jurisdictions. For information on those funds, please see

captcha image

Type in the word seen on the picture

I am a current investor in another jurisdiction