Dollar Soft as Big Central Bank Week Begins

September 18, 2023
  • U.S. yields are on the rise ahead of the FOMC meeting; recent data have been mixed enough for the Fed to skip this week; as of this writing, the auto strike continues; there will only be minor data reported today
  • We think the discussion at the ECB has now shifted from how high to how long; some ECB officials clearly believe rates have peaked; Czech National Bank Governor Michl is pushing back against rate cut bets; this crystalizes the dilemma that many central banks face
  • Singapore reported weak August trade data

The dollar is a bit softer as an eventful week of central bank meetings begins. Six major central banks meet, along with six EM central banks. DXY is trading lower for the second straight day near 105.184 after three straight up days took it up to the highest since March 9 near 105.435 last Thursday. It remains on track to test that month's high near 105.885. The euro is trading higher near $1.0675 but remains on track to eventually break below the May low near $1.0635 and test the March low near $1.0515 after the dovish ECB decision (see below). Sterling is trading higher near $1.2410 but remains on track to test the May low near $1.2310. Break below sets up a test of the March low near $1.1805. USD/JPY is trading lower near147.65 after trading at a new cycle high near 148 Friday. The pair 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. Indeed, the worsening outlook in Europe led the ECB to deliver a dovish message yesterday and we believe the BOE will follow suit this week. Along with firm U.S. data and a hawkish Fed, this would feed into further dollar strength.


U.S. yields are on the rise ahead of the FOMC meeting. The 10-year yield is trading near 4.35%, just shy of the 4.36% cycle high in August, while the 30-year yield is trading near 4.44%, just shy of the 4.47% cycle high in August. The short end is lagging a bit, as the 2-year yield is trading near 5.06%, below the 5.12% cycle high in August. The real U.S. 10-year yield touched 2% today, a level it hasn’t hit since February 2009.

Recent data have been mixed enough for the Fed to skip this week. When all is said and done, however, 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. Financial conditions are the loosest since early March 2022, before the Fed started hiking. Simply put, current conditions warrant further tightening. WIRP suggests only 5% odds of a hike this week. Most likely, we will see the next hike November 1. 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., the current 33% odds of a hike then are way too low. Due to the media embargo, there are no Fed speakers this until Chair Powell’s press conference Wednesday afternoon.

As of this writing, the auto strike continues. Over the weekend, the UAW rejected a 21% pay raise offer from Stellantis (formerly Chrysler). Talks between the union and the automakers will reportedly resume today. As we wrote Friday, It's way too early to try and estimated the potential economic costs of the strikes. These costs will depend on both the breadth and the duration and right now, both are unknown.

There will only be minor data reported today. New York Fed services index will be reported. Last week, the Empire manufacturing survey came in at 1.9 vs. -10.0 expected and -19.0 in August. September NAHB housing market index is expected to remain steady at 50. July TIC data will also be reported.


We think the discussion at the ECB has now shifted from how high to how long. The key phrase in the statement, which Madame Lagarde emphasized several times in her press conference, was “Based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.” WIRP suggests 5% odds of another hike October 26, then rising modestly to top out near 30% December 14. The first cut is still seen around mid-2024.

Some ECB officials clearly believe rates have peaked. Kazimir said that last week’s hike may have been the final one, adding “If we’re at the top, it will be necessary to stay here for quite some time and spend the winter, spring and summer here. It remains open and unanswered how long it will be necessary to stay with rates at peak levels.” Elsewhere, Kazaks focused on that as well and warned that “The market shouldn’t expect that we would jump too early to cut rates. We’ll start cutting rates when we see that we consistently and significantly start to undershoot our target, and what I can say clearly is that expectations of a rate cut in spring or early summer in my view are not really consistent with the macro scenario that we have.”

The split between the hawks and doves remains. After the decision, Holzmann and Vasle would not rule out further hikes. On the other hand, Guindos, Simkus, and Muller said further hikes were unlikely. Today, Guindos said core inflation has peaked and should continue to moderate. As usual, Lagarde was stuck in the middle and said she cannot say that rates have peaked. That said, the acrimony seems to be growing as reports suggest Lagarde seized her colleagues’ phones ahead of the meeting to prevent any leaks.

Czech National Bank Governor Michl is pushing back against rate cut bets. Specifically, he said “Inflation is still extremely high, which is why we should all forget about cutting interest rates any time soon. Don’t expect at all that we will cut in September, October or something like that. Just forget about rate cuts. We will keep restrictive monetary policy until we are certain that inflation will be around 2% not only in the first half of 2024 but also later.” Michl is trying to differentiate the bank from its counterparts in Hungary and Poland, both of which have started aggressive easing cycles even as inflation remains high and above target. Next policy meeting is September 27 and rates are expected to remain steady at 7.0%. Despite Michl’s comments, the swaps market is still pricing in 75 bp of easing over the next three months.

This crystalizes the dilemma that many central banks face. Inflation remains elevated but their economies are slipping into recession. Hungary and Poland have prioritized growth but at a cost of higher inflation and weaker currencies, which in turn feed back into even higher inflation. And it’s not just EM. In DM, both the eurozone and the U.K. are slipping into recession but their central banks have had to continue tightening. The tightening cycle appears to have ended for the ECB and we suspect the BOE will deliver a similar message at this week’s meeting.


Singapore reported weak August trade data. Non-oil domestic exports came in at -20.1% y/y vs. -17.1% expected and a revised -20.3% (was -20.2%) in July, while electronics exports came in at -21.1% y/y vs. -26.1% in July. Shipments appear to be stabilizing but it’s hard to come up with a more optimistic outlook when global growth is still slowing. With regards to China, we can’t get excited about a recovery just yet. With Singapore growth still at risk, we expect the MAS to maintain steady policy at the October meeting after a protracted tightening cycle that just ended at the last meeting in April.  

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