Dollar Remains Under Pressure as New Week Begins

July 17, 2023

Win Thin

Markets are marking time ahead of June retail sales data tomorrow; Fed expectations actually haven’t changed that much; regional Fed surveys for July start rolling out
U.K. doctors announced more strike dates, rejecting the government’s latest offer of a 6% pay raise; BOE tightening expectations remain elevated
China reported soft Q2 GDP data as well as mixed June IP and retail sales; PBOC kept its key 1-year MLF rate steady at 2.65%, as expected

The dollar remains under pressure as the new week begins. DXY is trading slightly lower just below 100 and clean break sets up a test of the late March 2022 low near 97.685. The euro traded at a marginal new high for this move near $1.1250 and is on track to test the February 2022 high near $1.15. Sterling is lagging a bit and is trading just below $1.31 after trading Friday at the highest since April 2022 near $1.3140. Still, it remains on track to test its March 2022 high near $1.33. USD/JPY remains heavy near 138 after it traded Friday at the lowest since May near 137.25. Clean break below 138 sets up a test of the mid-May low near 133.75. We remain frustrated with this ongoing dollar weakness, which we view as being at odds with the underlying fundamental story. However, we have to respect the price action. The bearish momentum remains too strong right now and so further near-term losses are likely.

AMERICAS

Markets are marking time ahead of June retail sales data tomorrow. Can consumption hold up? For now, yes. On Friday, University of Michigan consumer sentiment came in much stronger than expected at 72.6 vs. 64.4 in June and was the highest since September 2021. This suggests consumption is likely to remain robust as we move into H2.

Fed expectations actually haven’t changed that much. A 25 bp hike July 26 is still largely priced in, while the odds of a second 25 bp hike are still hovering just above 30%. Lastly, the first cut is not priced in until next March. And yet the dollar remains under relentless pressure. We do not think this weakness was warranted given the underlying fundamental story and yet here we are. Until the current soft landing narrative changes, it will be hard for the dollar to recover significantly. Indeed, there are no Fed speakers this week that might help change this narrative. Due to the media blackout, there are no Fed speakers until Chair Powell’s post-decision press conference next Wednesday.

Regional Fed surveys for July start rolling out. Empire manufacturing survey kicks things today and is expected at -3.5 vs. 6.6 in June. New York Fed services survey will be reported tomorrow. Philly Fed survey will be reported Thursday and is expected at -10.0 vs. -13.7 in June. While the manufacturing sector is clearly under pressure, the services sector remains robust. Of note, the Atlanta Fed’s GDPNow model is currently tracking Q2 growth of 2.3% SAAR. Next model update comes tomorrow after the retail sales data.

EUROPE/MIDDLE EAST/AFRICA

U.K. doctors announced more strike dates, rejecting the government’s latest offer of a 6% pay raise. The British Medical Association said senior doctors would strike August 24 and 25 and will be in addition to strikes already planned for next week. Train workers will strike next week. Of note, government estimates show the U.K. has so far lost nearly 4 mln working days due to the ongoing strikes. With inflation running nearly 9%, nominal wage gains have not kept pace and so real wages have truly suffered. As such, it’s no surprise that public sector workers are trying to get a bigger pay hikes, though Prime Minister Sunak said last week that this was the final offer.

BOE tightening expectations remain elevated. WIRP suggests another 50 bp hike is largely priced August 3, followed by 25 bp hikes September 21, November 2, and early 2024 that would see the bank rate peak near 6.25%. This would represent the most aggressive tightening cycle in the majors so far in terms of absolute magnitude and so a deep recession is now back on the table after some earlier optimism that one might be avoided. Updated macro forecasts will come at the August meeting and will have to acknowledge the worsening backdrop.

ASIA

China reported soft Q2 GDP data as well as mixed June IP and retail sales. GDP came in as expected at 0.8% q/q vs. 2.2% in Q1, but the y/y rate came in at 6.3% vs. 7.1% expected and 4.5% in Q1. Note that the y/y rate was flattered by a low base effect, as the economy was suffering from widespread lockdowns last year. IP came in at 4.4% y/y vs. 2.5% expected and 3.5% in May, while sales came in at 3.1% y/y vs. 3.3% expected and 12.7% in May. Elsewhere, fixed asset investment came in at 3.8% YTD vs. 3.4% expected and 4.0% in May, while property investment came in at -7.9% YTD vs. -7.5% expected and -7.2% in May.

People’s Bank of China kept its key 1-year MLF rate steady at 2.65%, as expected. The economy is clearly slowing and so there will be pressure on policymakers to add more stimulus in H2. For now, however, their approach is cautious. China’s commercial banks will set their key 1- and 5-year Loan Prime Rates Thursday and are expected to be kept steady at 3.55% and 4.20%, respectively.

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