Dollar Firm Ahead of Key PCE Data

February 24, 2023
  • January PCE will be the data highlight; Fed tightening expectations remain elevated; yet financial conditions continue to loosen; weekly jobless claims remain low; January Chicago Fed NAI came in firm; Brazil reports mid-February IPCA inflation and January current account data
  • Germany revised Q4 GDP data down; ECB hawks remain vocal; U.K. reported improved February GfK consumer confidence; BOE tightening expectations have crept higher
  • BOJ Governor-elect Ueda seemed to set the table for an eventual policy shift; expected BOJ liftoff is not imminent; Japan reported January national CPI data; RBNZ Assistant Governor Karen Silk sounded hawkish

The dollar continues to firm ahead of key PCE data. DXY is up for the fourth straight day and trading at a new high for this move near 104.873. We look for a test of the January 6 high near 105.631. The euro is trading at a new low for this move near $1.0575 and remains on track to test the January 6 low near $1.0485. Sterling is trading back near $1.1980 as recent bounces have not been sustained. We look for cable to revisit last week’s low near $1.1915 and a break below that would set up a test of the January 6 low near $1.1840. USD/JPY is trading at a new high for this move near 135.45 as BOJ Governor-elect signaled caution about removing accommodation prematurely (see below). We look for a test of the December 20 high near 137.50, right before the BOJ shocked markets with its YCC tweak. To state the obvious, the recent U.S. data have come around to support our more hawkish view on the Fed, which in turn supports our call for a stronger dollar. Market sentiment is finally swinging back in the dollar’s favor and we remain hopeful that the data continue to encourage this shift.


January PCE will be the data highlight. Headline is expected to remain steady at 5.0% y/y, while core is expected to fall a tick to 4.3% y/y. Of note, revised Q4 GDP data saw PCE revised up to 3.9% vs. 3.5% previously and core PCE revised up to 4.3% vs. 3.9% previously. It appears there was greater inflation momentum than previously thought as Q1 began; taken in conjunction with the January CPI and PPI data reported last week, we see upside risks to PCE today. Keep an eye on the so-called “super core” PCE (core services ex-housing) that Fed Chair Powell has emphasized. Personal income and spending will be reported at the same time and are expected at 1.0% m/m and 1.4% m/m, respectively.

Fed tightening expectations remain elevated. WIRP suggests 25 bp hikes in March, May, and June are priced in that takes Fed Funds to 5.25-5.50%. Given how strong the data have been recently, we see growing risks of a fourth 25 bp hike that takes us up to 5.50-5.75%. Right now, there are only around 10% odds of that fourth hike in July but this should rise if the data continue to run hot. Strangely enough, an easing cycle is still expected to begin in Q4 but at much lower odds. Eventually, it should be totally priced out into 2024 in the next stage of Fed repricing.

Yet financial conditions continue to loosen. As of February 17, conditions as measured by the Chicago Fed are the loosest since mid-February 2022. Its adjusted measure is the loosest since early February. This must be frustrating for the Fed but all it can do is to continue hiking rates and giving hawkish forward guidance. At some point soon, we think conditions will have to tighten as interest rates continue to rise. Credit spreads have also started to widen out this month and so perhaps we are at the beginning of this adjustment process. Now, if only the equity markets would get the message……

Weekly jobless claims remain low. Initial claims fell to 192k vs. 200k expected and a revised 195k (was 194k) last week. This reading was for the BLS survey week containing the 12th of the month. The 4-week moving average ticked higher to 191k but this is still lower than what was during the survey week for January (207k), December (221k), November (227k), and October (212k). In fact, this average hasn't been this low for a BLS survey week since last April (178k). Bloomberg consensus for NFP is currently at 200k vs. 517k in January, which would be another solid number. Bottom line: labor market is showing no signs of weakness despite the highly publicized layoffs in tech and finance.

January Chicago Fed National Activity Index came in firm. Headline was 0.23 vs. -0.25 expected and a revised -0.46 (was -0.49) in December. A zero reading means the economy is growing at around trend and so we are back at above trend growth after three straight months below trend. As a result, the 3-month moving average improved to -0.26 vs. -0.33 in December. Recall that when that 3-month average moves below -0.7, that signals imminent recession and we are still well above that threshold. This series has taken on greater significance now that the 3-month to 10-year curve has inverted deeply. The continued resilience in the economy is noteworthy and suggests the Fed still has a lot more work to do in getting to the desired sub-trend growth. Of note, the Atlanta Fed’s GDPNow model is currently tracking 2.5% SAAR and the next model update will come today after the data. If this rate is maintained, it would be the third straight quarter of above trend growth in the U.S. February Kansas City Fed services index will also be reported today, along with January new homes sales. Sales are expected at 0.7% m/m vs. 2.3% in December.

Brazil reports mid-February IPCA inflation and January current account data. Inflation is expected at 5.59% y/y vs. 5.87% in mid-January. If so, it would be the lowest since early 2021 but still above the 1.75-4.75% target range. Central bank President Campos Neto gave a masterful performance last Friday, expressing a desire to work with Lula’s economic team but also refusing to give in on cutting rates or raising the inflation target. Unfortunately, we expect tensions with Lula to continue over the near-term. Next COPOM meeting is March 22 and rates are expected to remain steady at 13.75% for the next 3 months. However, the swaps market is pricing in the start of an easing cycle over the subsequent 3 months, which seems very unlikely.


Germany revised Q4 GDP data down. The economy contracted -0.4% q/q vs. -0.2% preliminary. This led the y/y rate to be revised down to 0.3% (0.9% WDA) vs. 0.5% (1.1% WDA) preliminary. This was due largely to weaker private consumption and capital investment, which came in at -1.0% q/q and -2.5% q/q, respectively. Both worked to more than offset the 0.6% q/q gain in government spending. Germany also reported March GfK consumer confidence as expected at -30.5 vs. a revised -33.8 (was -33.9) in February. While many of the survey indicators appear to have bottomed, we warn against getting too excited about the eurozone outlook as the hard data remain weak. Indeed, the Q4 GDP revisions provided a good reminder of this. Of note, France and Italy report Q4 GDP revisions next week, while Spain reports later in March.

ECB hawks remain vocal. Nagel said “I don’t exclude that further significant rate hikes may be needed beyond March.” This means he favors another 50 bp hike in May to follow up the widely expected 50 bp hike in March. WIRP suggests a 50 bp hike March 16 is nearly 80% priced in. Looking further ahead, a 50 bp hike May 4 is nearly 60% priced. Another 25 bp hike June 15 is fully priced in, as is one last 25 bp hike July 27 that would result in a peak policy rate near 3.75%, up from 3.5% at the start of last week. These expectations are likely to drift lower if continued disinflation gives the doves the upper hand again. For now, however, it appears that the hawks remain in the driver’s seat.

U.K. reported improved February GfK consumer confidence. It came at -38 vs. -43 expected and -45 in January and was the biggest monthly gain in nearly two years to the highest since last April. That said, we simply cannot get that excited about the modest recovery in the sentiment indicators as the hard data remain weak.

BOE tightening expectations have crept higher. WIRP suggests a 25 bp hike March 23 is nearly priced in. After that, a 25 bp hike is 80% priced in for May 11, while the odds of one last 25bp hike top out near 80% in Q3 and so the expected terminal rate has drifted higher to 4.75% vs. 4.5% at the start of this week. This is still well below the peak near 6.25% right after the disastrous mini-budget back in September. Tenreyro speaks later today.


Bank of Japan Governor-elect Ueda seemed to set the table for an eventual policy shift. In his confirmation hearing, he said that “If another clear step up in improvement in the outlook for the price trend comes into sight, we’ll inevitably have to think about a review of yield curve control or a move in the direction of policy normalization.” However, Ueda stressed that “If I’m appointed BOJ governor, my mission isn’t to come up with some kind of magical, special monetary policy. As I’ve mentioned before, if you look at the trend in prices, there are improvements we’re seeing, but the situation remains that it’ll still take some time until we’ve securely achieved 2% inflation.” Lastly, Ueda said that here was no need to change the 2013 joint statement between the central bank and the government that commits the BOJ to achieving a 2% inflation target.

Expected BOJ liftoff is not imminent. Next BOJ policy meeting March 9-10 will be the last one under current Governor Kuroda and while no change is expected, we simply cannot rule out one last surprise. WIRP suggests over 20% odds of liftoff April 28, rising to nearly 55% June 16 and then 80% for July 28. That said, the actual tightening path is seen as very mild as the market is pricing in 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.

Japan reported January national CPI data. Headline came in as expected at 4.3% y/y vs. 4.0% in December, while core (ex-fresh food) came in a tick lower than expected at 4.2% y/y vs. 4.0% in December and core ex-energy came in a tick lower than expected at 3.2% y/y vs. 3.0% in December. Price pressures continue to rise, though PPI inflation is showing signs of peaking. Furthermore, February Tokyo CPI will be reported next week and is expected to show a significant drop as some of Prime Minister Kishida’s energy subsidies kick in. Headline is expected at 3.5% y/y vs. 4.4% in January, core is expected at 3.4% y/y vs. 4.3% in January, and core ex-energy is expected at 3.1% y/y vs. 3.0% in January.

Reserve Bank of New Zealand Assistant Governor Karen Silk sounded hawkish. She said “This is still an economy that has excess demand, a tight labor market, and as a consequence both headline inflation and core inflation at levels that are well outside the band. So there’s still more work to do here.” Silk stressed that there are still upside risks to the inflation outlook and that the forecast peak in the policy rate of 5.5% is “not set in stone.” In terms of upcoming rate hikes, she said “All levels are on the table for discussion at every meeting. I’m not going to turn round and comment on whether we would be looking at 25, 50 or 75, they will all be on the table for discussion and they will depend on the information at hand.” Lastly, she said that a pause in tightening is “certainty not something that we’re contemplating at this point in time.” Silk’s comments are in sync with the bank’s hawkish message after it hiked rates 50 bp to 4.75% this week. WIRP suggests a 50 bp hike is nearly 45% priced in for the next meeting April 5, while the odds of one final 25 bp hike in Q3 top out near 75% that would see the policy rate peak near 5.5%.

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.

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

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

captcha image

Type in the word seen on the picture

I am a current investor in another jurisdiction