Dollar Firm as Powell Resets Market Expectations

March 08, 2023
  • Fed Chair Powell was unmistakably hawkish; Powell’s comments are especially powerful as they come just weeks ahead of the March 21-22 FOMC meeting; Fed Beige Book for the upcoming FOMC meeting will be released; ADP private sector jobs estimate will be today’s highlight; BOC is expected to keep rates steady at 4.5%
  • The eurozone stagnated in Q4; eurozone January readings came in mixed; BOE officials remain dovish
  • The yen continues to weaken ahead of the BOJ decision this Friday; January current account data are worth discussing; RBA Governor Lowe echoed the bank’s dovish hike; the move to a less hawkish stance by the RBA even as the Fed ratchets up its rhetoric points to widening monetary policy divergences

The dollar remains firm in the wake of Powell’s testimony. DXY traded at the highest since December 1 near 105.883 today and is on track to test the November 30 high near 107.195. The 200-day moving average near 106.573 may offer some resistance. The euro traded at the lowest since January 6 near $1.0525 today and is on track to test that day’s low near $1.0485. Sterling traded at the lowest since November 21 near $1.1810 and is on track to test that day’s low near $1.1780. USD/JPY traded at the highest since December 16 near 137.90 today and is on track to test the December 15 high near 138.15. After that is the November 30 high near 139.90. To state the obvious, Fed Chair Powell successfully reset market expectations yesterday (see below). Along with the strong U.S. data, recent developments have come around to support our more hawkish view on the Fed, which in turn supports our call for a stronger dollar.


Fed Chair Powell was unmistakably hawkish. He delivered a short and simple message in his appearance before the Senate Banking Panel yesterday by noting “The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.” This was a double whammy, indicating that not only will rates go higher but they could go higher at a faster rate than expected. He added that “Although inflation has been moderating in recent months, the process of getting inflation back down to 2% has a long way to go and is likely to be bumpy.” To his credit, Powell made no dovish slips of the tongue and the message was loud and clear. He appears before the House Financial Services Committee today and is likely to maintain the same tone.

Powell’s comments are especially powerful as they come just weeks ahead of the March 21-22 FOMC meeting. Regarding that upcoming meeting, Powell noted that “We do have two or three more very important data releases to analyze before the time of the FOMC meeting. Those are going to be very important in the assessment we have of this relatively recent data.” Of course, this Friday’s jobs report is one of those releases, followed by CPI March 14 and PPI and retail sales data March 15. While Powell has delivered a hawkish message, it must be backed up by strong data in order to validate the market’s more hawkish take on the Fed.

The Fed’s Beige Book for the upcoming FOMC meeting will be released. We expect the report to highlight continue strength in the labor market in many Fed districts, as well as stubbornly high pockets of inflation. Economic activity is likely to remain relatively firm across many districts, as evidenced by the Atlanta Fed’s GDPNow model’s current estimate for Q1 GDP growth at 2.0% SAAR. The next model update comes today after the trade data. All in all, the Beige Book should be upbeat enough to give the Fed cover to hike rates this month. Barkin speaks today. After midnight Friday, the media embargo goes into effect and there will be no more Fed speakers until Chair Powell’s post-decision press conference March 22. Until then, let the data do the talking.

Fed tightening expectations have risen sharply. WIRP now suggests nearly 65% odds of a 50 bp hike at the March 21-22 FOMC meeting. Looking ahead, 25 bp hikes in May and June are priced in that would take Fed Funds to 5.50-5.75%, with nearly 30% odds of a last 25 bp hike in Q3 that would move the range up to 5.75-6.0%. After all this, an easing cycle is still expected to begin in Q4, albeit at much lower odds. Eventually, it should be totally and unequivocally priced out into 2024 during the next stage of Fed repricing. For now, we believe the uptrends in U.S. yields and the dollar remain intact.

Yield curve inversion continues. The rise in the 10-year yield has not kept pace with the rise in the 2-year yield, and so that curve has inverted to -107 bp, the most since 1981. Our favored measure is the 3-month to 10-year curve, which stands at -97 bp. While this is far from the deepest inversion from January (-127 bp), it nonetheless signals a likely recession over the next 12 months, which the New York Fed puts at nearly 60% odds.

ADP private sector jobs estimate will be today’s highlight. It is expected at 200k vs. 106k in January and comes ahead of the February jobs report Friday. Consensus sees 224k jobs added vs. 517k in January, with the unemployment rate seen steady at 3.4% and average hourly earnings picking up to 4.7% y/y vs. 4.4% in January. Obviously, the big question is whether January NFP gets revised significantly. JOLTS job openings will also be reported and expected at 10.586 mln vs. 11.012 mln in December. Trade balance will also be reported.

Bank of Canada is expected to keep rates steady at 4.5%. WIRP suggests 10% odds of a 25 bp hike today. Looking ahead, a final 25 bp hike to 4.75% is priced in for Q3 or Q4. This is subject to change, especially if we get a third straight strong jobs report this week. Canada also reports jobs data Friday. Consensus sees 10.0k vs. the whopping 150.0k in January, with the unemployment rate seen rising a tick to 5.1%. Ahead of that, January trade data will be reported today.


Eurozone stagnated in Q4. Final GDP data were revised down to flat q/q vs. 0.1% preliminary, which took the y/y rate down a tick to 1.8%. Government expenditure was revised up to 0.7% q/q but this was more than offset by the downward revisions to household consumption (-0.9% q/q) and GFCF (-3.6% q/q). This is not a great mix for growth and points to trouble ahead in Q1. Indeed, Bloomberg consensus for Q1 eurozone GDP stands at -0.3% q/q.

Eurozone January readings came in mixed. Germany reported January retail sales and IP. Sales came in at -0.3% m/m vs. 2.3% expected and a revised -1.7% (was -5.3%) in December, while IP came in at 3.5% m/m vs. 1.4% expected and a revised -2.4% (was -3.1%) in December. Elsewhere, Italy reported January retail sales at 1.7% m/m vs. 0.2% expected and -0.2% in December. We cannot get excited about the pockets of recovery being seen in some areas as the overall economic backdrop will get more challenging as the ECB hikes rates further and further.

ECB tightening expectations have moved higher. WIRP suggests a 50 bp hike March 16 is priced in while another 50 bp hike May 4 is about 80% priced in. A 25 bp hike is fully priced in June 15, with about 25% odds of a larger 50 bp move. Another 25 bp hike July 27 is priced in that would take the deposit rate to 4.0%. The odds of one last 25 bp hike in Q4 to 4.25% peak at around 66%. With CPI still running hot, it appears that the hawks remain in the driver’s seat. Lagarde and Panetta speak today.

BOE officials remain dovish. Dhingra said “Overtightening poses a more material risk at this point, through potential negative impacts from increased borrowing costs and reduced supply capacity going forwards. It risks unnecessarily denting output at a time when the economy is weak and deepening the pain for households when budgets are already squeezed through energy and housing costs.” Of note, she has been one of the most dovish members of the MPC, voting to hold rates the last two meetings in December and February and dissenting from the 50 bp hikes that were seen. BOE tightening expectations remain steady. WIRP suggests a 25 bp hike March 23 is priced in, as is a 25 bp hike May 11. Another 25 bp hike is fully priced in for August that would see the policy rate peak near 4.75%. Odds of one last 25 bp hike to 5.0% stand around 65%. This is still well below the peak near 6.25% right after the disastrous mini-budget back in September.


The yen continues to weaken ahead of the Bank of Japan decision this Friday. This two-day meeting will be the last one under current Governor Kuroda and while no change is expected, the markets can’t totally rule out one last surprise. We think that caution is one reason why the Yen has outperformed the past five days, but USD/JPY is still rising to trade near 138 today on the notion that liftoff is more likely to come later rather than sooner. Indeed, WIRP suggests nearly 20% odds of liftoff April 28, rising to over 40% June 16 and then nearly 70% for July 28. That said, the actual tightening path is seen as very mild as the market is pricing in only 20 bp of tightening over the next 12 months followed by only 30 bp more over the subsequent 24 months. That is why we expect the knee-jerk drop in USD/JPY after liftoff to be fairly limited.

January current account data are worth discussing. The adjusted surplus came in at JPY216 bln vs. JPY803 bln expected and JPY1.2 trln in December. However, the investment flows will be of most interest. January data showed that Japan investors turned net buyers of U.S. bonds (JPY357 bln) again after being net sellers four straight months and for thirteen of the past fifteen. Japan investors remained net sellers (-JPY152 bln) of Australian bonds for the seventh straight month and turned net sellers of Canadian bonds (-JPY101 bln) again and for eleven of the past twelve months. Investors turned net buyers of Italian bonds (JPY112 bln) again and for three of the past four months. Japan investors were total net buyers of foreign bonds (JPY885 bln) for the first time since August.

Reserve Bank of Australia Governor Lowe echoed the bank’s dovish hike. After the bank hiked rates 25 bp to 3.60% this week, it said “In assessing when and how much further interest rates need to increase, the Board will be paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market.” Today, Lowe was more specific and noted that the RBA will be guided by incoming data on employment, inflation, retail sales, as well as various business surveys in deciding on whether to hike rates or pause at the April 4 meeting. He noted that “If collectively they suggest the right thing is to pause then we’ll do that, but if they suggest that we need to keep going we’ll do that. So we’ve got a completely open mind about what happens at the next board meeting.” WIRP suggests nearly 45% odds of a 25 bp hike next month.

The move to a less hawkish stance by the RBA even as the Fed ratchets up its rhetoric points to widening monetary policy divergences. Lowe said as much when he noted that the RBA will not need to raise rates as much as the Fed does to cool the economy due to the widespread use of floating rate mortgages in Australia, which hits consumer spending directly. In turn, this should continue to take a toll on the Aussie. AUD traded at the lowest level since November 10 near .6570 earlier today before rebounding modestly to trade back above .6600. Clean break below the .6610 sets up a test of the November low near .6270.

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