Dollar Continues to Trade Sideways

May 21, 2024
  • Fed officials remain very cautious about easing prematurely; most measures show financial conditions remain quite loose; Canada highlight will be April CPI
  • Eurozone preliminary Q1 labor costs ran hot; U.K. CBI reported a soft May industrial trends survey; Hungary is expected to cut rates 50 bp to 7.25%; Nigeria is expected to hike rates 100 bp to 25.75%
  • RBA released its minutes; Australia reported weak consumer sentiment

The dollar continues to trade sideways. DXY has given back yesterday’s modest gains and is trading back near 104.491. The euro is trading higher near $1.0870 after higher-than-expected Q1 labor costs (see below), while sterling is trading higher near $1.2720 despite soft CBI industrial trends survey (see below). USD/JPY is trading slightly lower near 156.20. Despite last week’s data, we believe the backdrop of persistent inflation and robust growth in the U.S. remains largely in place. As such, we look for the dollar to eventually recover. Indeed, virtually every Fed official continues to signal that rate cuts are not imminent (see below).


Despite last week’s data, Fed officials remain very cautious about easing prematurely. Bostic said the new steady state interest rate is likely higher than the past decade. He said the Fed is open to all possibilities and many economic scenarios but stressed that Fed policy is restrictive. Barr said the Fed is in a good position to hold rates steady and watch how things evolve. He said restrictive policy needs further time to do its work. Jefferson said it’s too soon to know if the April CPI data is indicative of the future. He stressed that one can’t put too much focus on one data point but added that the April reading were encouraging. Daly said she’s not yet confident that inflation is coming down sustainably to the 2% target. That said, Daly said she saw no evidence right now of a need to hike rates. Mester said she doesn’t think inflation will come down quickly. She added that the Fed can raise rates if appropriate but that’s not her base case. Mester said she doesn’t think three cuts this year are still appropriate. She still sees risks to inflation tilted to the upside and that risks that the Fed was too restrictive have gone down.

Odds of a September cut have fallen back to 75% from 100% last week. Despite the softish data, the market is back to pricing in November for the first cut. It’s clear that the market remains unconvinced that the Fed will pivot earlier than previously anticipated. Barkin, Waller, Williams, Barr, Collins, Mester, and Bostic (twice) speak today. All are likely to echo the chorus of caution from yesterday.

Despite the Fed’s insistence, most measures show financial conditions remain quite loose. Besides the weekly Chicago Fed’s financial conditions reported every Wednesday, we also focus on the New York Fed’s monthly FCI-G measure. This is a slightly different construct as it seeks to show how financial conditions are actually affecting growth. Here, a negative reading implies financial conditions are boosting growth while a positive reading implies financial conditions are slowing growth. The April measure for a 1-year lookback was just reported last week at -0.38 vs. -0.57 in March. Financial conditions are still boosting growth, albeit slightly less so.

Regional Fed surveys for May will continue to roll out. Philly non-manufacturing will be reported today and stood at -12.4 in April.

Canada highlight will be April CPI. Headline is expected to fall two ticks to 2.7% y/y. If so, it would be the lowest since March 2021 and further within the 1-3% target range. Core median is expected to fall a tick to 2.7% y/y, while core trim is expected to fall two ticks to 2.9% y/y. Progress on inflation is tracking the BOC’s forecast and supports BOC Governor Macklem statement earlier this month that “we are getting closer” to a point where it could be time to cut rates. The market sees 45% odds of a cut in June, while a July cut fully priced in.


Eurozone preliminary Q1 labor costs ran hot. Costs rose 4.9% y/y vs. 3.4% in Q4 and are tracking higher than the ECB’s 2024 projection of 4.4%. The data point to upside risks to Thursday’s key Q1 ECB indicator of negotiated wages. Labor costs are comprised of employee compensation and productivity. Eurozone productivity is weak, so the bulk of the increase in labor costs over Q1 most likely reflects higher employee compensation.

Despite risks of lingering wage pressures, an ECB policy rate cut in June is virtually a done deal. However, elevated eurozone wage pressures suggest the easing cycle will be shallow, thereby limiting EUR downside. Cuts in September and December are about 85% priced in. We expect ECB official to continue laying the groundwork for a June cut. Lagarde speaks today and tomorrow.

U.K. CBI reported a soft May industrial trends survey. Total orders came in at -33 vs. -20 expected and -23 in April and was the lowest since January. Elsewhere, selling prices came in at 15 vs. 25 expected and 27 in April and was also the lowest since January. Distributive trades survey will be reported next Tuesday.

The start of the Bank of England’s easing cycle remains a toss-up. Odds of a June cut are around 55% but becomes fully priced in for August. This week’s CPI data will be key, though we get one more CPI report before the June 20 decision. Bailey speaks today. Yesterday, Broadbent said “If things continue to evolve with its forecasts - forecasts that suggest policy will have to become less restrictive at some point - then it’s possible Bank Rate could be cut some time over the summer.”

National Bank of Hungary is expected to cut rates 50 bp to 7.25%. At the last meeting April 23, the bank kept cut rates 50 bp to 7.75%. Deputy Governor Virag said that a 6.75-7.00% base rate by end-June was “realistic” but added that room for rate cuts in the second half of this year is limited. This would imply another 50 bp of cuts at the June policy meeting, bringing the policy rate to 6.75% by mid-year. Of note, the swaps market sees the base rate at 7.00% over the next twelve months.

Nigeria central bank is expected to hike rates 100 bp to 25.75%. However, one analyst polled by Bloomberg sees steady rates while two see a larger 200 bp hike. The bank has delivered hawkish surprises at its last two meetings. On February 27, the bank hiked rates 400 bp vs. 250 bp expected, while on March 26, it hiked rates 200 bp vs. 125 bp expected. Despite these hikes, inflation has continued to accelerate while the naira has weakened sharply since mid-April and so we see risks of another hawkish surprise.


Reserve Bank of Australia released its minutes. At the May 7 meeting, the RBA kept rates steady at 4.35% after it considered raising the cash rate or holding it steady. According to the minutes, the case to leave the cash rate unchanged was the stronger one as “members judged that it remained reasonable to look through short-term variation in inflation to avoid excessive fine-tuning.” That said, the minutes suggests the bar to ease policy is high, which should help limit AUD downside. The swaps market is pricing in steady rates over the next six months followed by 25 bp of easing over the subsequent six months.

Australia reported weak consumer sentiment. The Westpac Melbourne Institute Consumer Sentiment Index fell -0.3% m/m in May to a five-month low of 82.2 on cost-of-living pressures and inflation concerns. According to Westpac, “while expectations improved a touch in May, this was overshadowed by a further deterioration in current conditions and fears that persistently high inflation may require further interest rate rises.” Weak consumer sentiment complicates the RBA policy outlook.

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