Dollar Consolidates After Yesterday’s Gains

January 03, 2025
  • The dollar started off 2025 with a bang; growth remains robust; financial conditions remain loose; December ISM manufacturing PMI and vehicle sales will be reported; weekly claims fell
  • ECB Chief Economist Lane speaks today; Switzerland reported mixed December PMIs; Turkey reported December CPI data
  • The onshore yuan weakened past 7.30 for the first time since November 2023

The dollar is consolidating yesterday’s big gains. DXY is trading lower for the first time since last Friday near 109 after trading at a new cycle high near 109.533 yesterday. Further gains are likely (see below). The euro is trading higher near $1.03 after trading at a new cycle low yesterday near $1.0225, while sterling is trading higher near $1.2410 after trading as low as $1.2355 yesterday. With Japan on holiday until Monday, the yen continue to tread water with USD/JPY trading near 157.25. We look for dollar dominance to continue in 2025 due to the ongoing economic and monetary policy divergence themes. Simply put, the strong U.S. fundamental story of strong growth, elevated inflation, and a more hawkish Fed continues to favor higher UST yields and a higher dollar.

AMERICAS

The dollar started off 2025 with a bang. DXY broke above a key retracement objective near 108.972, which targets the September 2022 high near 114.778. Euro losses accelerated after the break below $1.03 and traded as low as $1.2025 yesterday. A break below the key retracement objective near $1.02 would set up a test of the September 2022 low near $0.9535. Cable traded at the lowest since April 2024 near $1.2355, just shy of that month’s low near $1.23 but still on track to test the October 2023 low near $1.2035. Japan will reopen from holiday this Monday and could help USD/JPY break out of its recent narrow trading ranges. The positive drivers for the dollar remain intact.

Growth remains robust. The Atlanta Fed GDPNow model is tracking Q4 growth at 2.6% SAAR and will be updated today after the data. Elsewhere, the New York Fed's Nowcast model is tracking Q4 growth at 1.9% SAAR and Q1 growth at 2.1% SAAR and will also be updated today.

Financial conditions remain loose. The Chicago Fed’s measure has loosened ten straight weeks and are the loosest since November 2021. This will help support growth ahead of an expected slug of fiscal stimulus later this year.

December ISM manufacturing PMI will be the data highlight. Headline is expected to fall two ticks to 48.2. Keep an eye on prices paid, which is expected at 51.8 vs. 50.3 in November. Yesterday, the final S&P Global manufacturing PMI came in at 49.4 vs. 48.3 preliminary and 49.7 in November. ISM services PMI will be reported next Tuesday and is expected at 53.0 vs. 52.1 in November.

December vehicle sales will also be reported. Sales are expected to remain steady at a 16.50 mln annual pace, the strongest since May 2021. With the labor market remaining in solid shape, consumption is likely to remain strong going into 2025.

Weekly claims fell. Initial claims came in at 211k vs. 221k expected and a revised 220k (was 219k) previously. These are the lowest since late April, while the 4-week moving average fell to a one-month low of 223k. Elsewhere, continuing claims came in at 1.844 mln vs. 1.890 mln expected and a revised 1.896 mln (was 1.910 mln) previously. These are the lowest since mid-September. Overall, these readings suggest the labor market remains in solid shape. Looking ahead to next week’s jobs report, Bloomberg consensus for NFP is 153k while its whisper number is 185k.

EUROPE/MIDDLE EAST/AFRICA

European Central Bank Chief Economist Lane speaks today. With inflation creeping higher, Lane is likely to present a cautious case for further easing. The market is fully pricing in a 25 bp cut at the next meeting January 30 but only 100 bp of total easing over the next 12 months that would see the policy rate bottom near 2.0%. This is up from around 1.5% right after the December 12 meeting and 1.75% in late December. The eurozone economic outlook has not improved at all and so we think the market pricing for the ECB has gotten too hawkish.

Switzerland reported mixed December PMIs. Manufacturing fell a tick to 48.4 while services rose nearly a point and a half to 53.2, the highest since April 2024. Still, with inflation running below the SNB’s projections, the bank is likely to continue cutting rates. The market is fully pricing in 50 bp of easing in H1 that would take the policy rate to zero, with around 25% odds of another cut in H2 that would push that rate into negative territory.

Turkey reported December CPI data. Headline came in at 44.38% y/y vs. 45.20% expected and 47.09% in November, while core came in at 45.34% y/y vs. 45.80% expected and 47.13% in November. Headline was the lowest since June 2023 and core the lowest since February 2022. More importantly, the m/m gain in headline of 1.03% was the smallest since May 2023. Last week, the central bank started the easing cycle with a 250 bp cut to 47.50% vs. 175 bp expected. It also narrowed its rates corridor to 300 bp vs. 600 bp previously. The bank said that future decisions would be made on a “meeting-by-meeting basis with a focus on the inflation outlook.” The swaps market is pricing in 550 bp of easing over the next three months.

ASIA

The onshore yuan weakened past 7.30 for the first time since November 2023. State banks have reportedly been defending that level in recent weeks but stepped back today. Of note, the PBOC kept its daily fix below 7.20, meaning it is still trying to limit spot weakness. Elsewhere, the offshore yuan weakened past 7.35 again after doing so in late December for the first time since September 2023. China can continue to lean against the wind but if the dollar continues its broad-based gains, policymakers will eventually have to let the yuan weaken even more. With the rest of EM FX under pressure, China is losing export competitiveness by limiting yuan weakness.

SHOW ALL

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. 2024. All rights reserved.

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

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 bbhluxembourgfunds.com



captcha image ↻

Type in the word seen on the picture

I am a current investor in another jurisdiction

1 of 2

2 of 2