Dollar Consolidates Ahead of Key Data This Week

February 12, 2024

Win Thin

Fed officials will remain in the spotlight; New York Fed reports January inflation expectations; growth remains strong in Q1
It's a particularly busy week in the U.K.; ECB officials are setting the table for the start of the easing cycle
RBNZ Governor Orr appeared before a parliamentary committee; India reports January CPI and December IP

The dollar continues to consolidate ahead of key U.S. data later this week. DXY is trading flat for the second straight day near 104.141. The euro is trading lower near $1.0770 while sterling is trading lower near $1.2615. USD/JPY is trading heavy near 149 after trading Friday at a new high for this move near 149.60. When all is said and done, recent developments support our view that the Fed is unlikely to cut rates anytime soon. The data continued to come in on the firm side while Fed officials remain cautious about easing (see below). We still believe that the current market easing expectations for the Fed still need to adjust significantly. These expectations have started to shift but more needs to be seen, even after the Fed’s hawkish hold and the January jobs data. This week brings CPI, PPI, and retail sales data. We expect the data to continue justifying a much less pronounced Fed easing cycle than is currently priced in by the market and this should help support the dollar.

AMERICAS

Fed officials will remain in the spotlight. Despite the lack of major U.S. data releases last week, many provided insight on current Fed thinking. Everyone single speaker last week took a very cautious tone on potential easing, and we expect that tone to persist this week. The market sees less than 20% odds of a cut in March, rising to 75% in May. Between now and the March 20 decision, we will get another jobs report and two each of CPI, PPI, retail sales, and PCE. This week brings an onslaught of key January data (CPI, PPI, and retail sales) and will likely test the market’s continued belief in a dovish Fed. Bowman, Barkin, and Kashkari speak today.

New York Fed reports January inflation expectations. All three of the New York Fed’s measures have been falling steadily and we expect this to continue in early 2024. However, policymakers are likely to be troubled by the fact that the longer-term expectations remain well above its 2% target. If this persists, it will support the Fed’s cautious stance. January budget statement will also be reported today.

Growth remains strong in Q1. The New York Fed’s Nowcast model’s Q1 estimate still stands at 3.3% SAAR vs. 2.8% previously and will be updated Friday. Its estimates for Q2 will begin in early March. Elsewhere, the Atlanta Fed’s GDPNow model is tracking Q1 growth at 3.4% SAAR vs. the first estimate of 3.0%. The early estimates are often volatile, and the next update comes Thursday after the data.

EUROPE/MIDDLE EAST/AFRICA

It's a particularly busy week in the U.K. The labor force survey (Tuesday), CPI (Wednesday), GDP and other real sector activity (Thursday), and retail sales (Friday) will all be reported. Usually, these key indicators are reported over the span of two weeks and so markets should pretty quickly have a better idea of how the U.K. economy is faring. The market has priced in slightly more than 75 bp of total easing this year, starting in August. Compare this to the start of this year, when markets saw the first cut in June and nearly 125 bp of total easing in 2024. Even with lower expectations, the risk is that the BOE does not ease that much if underlying inflation pressures (like services CPI and private sector wage growth) remain sticky to the upside. Governor Andrew Bailey speaks today and again Wednesday.

ECB officials are setting the table for the start of the easing cycle. De Cos implied the March 7 meeting will be important as “The projections will be key to assessing, first, whether we can be sufficiently confident that our 2% medium-term target will be achieved, taking into account the associated risks, and second, the rate path that is compatible with reaching our symmetric target.” Chief Economist Lane gives a keynote speech at a conference and then participates in a roundtable discussion later today. Last week, Lane laid more of the groundwork for a dovish pivot for perhaps as soon as April, noting that “incoming data suggest that the process of disinflation in the near term in fact may run faster than previously expected.” Similarly, Governing Council member Panetta highlighted over the weekend that “macroeconomic conditions suggest that disinflation is at an advanced stage, and progress toward the 2% target continues to be rapid.” The market sees a 60% probability of a 25 bp rate cut in April along with 125 bp of total easing this year. Cipollone also speaks today.

ASIA

RBNZ Governor Orr appeared before a parliamentary committee. He sounded hawkish as he noted “Inflation at 4.7% annualized is still too high, we’re aiming for 2%. That’s why we’ve retained a restrictive monetary policy stance with the Official Cash Rate at 5.5%, and we’ll be back at the end of this month again with our updated views on the wisdom of that stance and the length which we have to be there.” He speaks again Thursday, and markets remain on high alert after the recent call from a major New Zealand bank for a 25 bp hike to 5.75% this month followed by another 25 bp hike to 6.0% in April. It’s worth recalling that at the last meeting November 29, the bank delivered a hawkish hold as the bank said it discussed a rate hike before deciding on no change. The expected rate path showed an end-2024 policy rate of 5.7% vs. 5.5% previously, suggesting high odds of one last hike. The market is now pricing in 33% odds of a hike February 28 vs. 10% at the start of last week. Those odds rise to 60% April 10 and 65% May 22. However, the market is not pricing in any odds of a second hike.

India reports January CPI and December IP. Headline is expected at 4.99% y/y vs. 5.69% in December, while IP is expected to pick up a tick to 2.5% y/y. If so, headline would be the lowest since October and reverse two straight months of acceleration. WPI will be reported Wednesday and is expected at 0.52% y/y vs. 0.73% in December. The Reserve Bank of India just delivered a hawkish hold. The vote was 5-1 and the bank maintained its policy stance at “withdrawal of accommodation.” Governor Das stressed that “The job is not yet finished and we have to be vigilant of new supply shocks.” Nonetheless, the swaps market is pricing in the start of an easing cycle with a 25 bp cut over the next three months. A total of 75 bp of easing is seen over the next 12 months that would see the policy rate bottom at 5.75%.

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. 2022. All rights reserved.