Dollar Firm Despite Hawkish RBNZ and Hot U.K. CPI

May 22, 2024
  • FOMC minutes will be released; Fed officials remain very cautious about easing prematurely; financial conditions continue to loosen; housing sector data will remain in focus
  • ECB officials to continue laying the groundwork for a June cut; U.K. April CPI ran a little hotter than expected; the start of the BOE easing cycle has been pushed out
  • The 10-year JGB yield moved above the key 1% level; Japan reported April trade and March core machine orders; RBNZ delivered a hawkish hold; Indonesia kept rates steady at 6.25%, as expected

The dollar continues to edge higher. DXY is trading higher for the third straight day near 104.731 as markets pare back Fed easing expectations (see below). DXY has retraced nearly half of the post-PPI/CPI losses and a break above 104.932 would set up a test of the May 14 high near 105.458. The euro is trading lower near $1.0840, while sterling is trading higher near $1.2725 after higher-than-expected April CPI data (see below). USD/JPY is trading higher near 156.45 despite the continued rise in JGB yields (see below). Lastly, NZD is the best performing major after the RBNZ delivered a hawkish hold (see below). Despite last week’s data, we believe the backdrop of persistent inflation and robust growth in the U.S. remains largely in place. Markets have already taken back Fed easing expectations and so we look for the dollar recovery to continue. Indeed, virtually every Fed official continues to signal that rate cuts are not imminent (see below).


FOMC minutes will be released. At that meeting, the Fed kept rates steady. The tone of the policy statement was little changed, with the Fed acknowledging the worsening inflation outlook by adding that “In recent months, there has been a lack of further progress toward the Committee's 2% inflation objective.” As always, Powell delivered the fireworks in his dovish post-meeting press conference but his difference in tone from the more balance policy statement suggests there was likely some underlying dissent within the discussions. As such, we see risks of a hawkish tilt in the minutes. The market sees no odds of a cut in June, only 20% in July and 70% in September. These odds are now lower than they were before last week’s data, so it’s clear that the market remains unconvinced that the Fed will pivot earlier than previously anticipated.

Fed officials remain very cautious about easing prematurely. Waller said, “In the absence of a significant weakening in the labor market, I need to see several more months of good inflation data before I would be comfortable supporting an easing in the stance of monetary policy.” He added that he believes further rate hikes are “probably unnecessary.” Barr said the Fed needs to sit tight “for longer than we previously thought.” He added that interest rate risk will continue and needs to be managed, with the Fed exploring the addition of some sort of “funding shock” to this year’s stress tests. Collins said the Fed has time to be patient on rates and is well-positioned. She added that we are in a period where patience really matters. Mester said the Fed is not taking a big risk now by keeping rates steady, as the labor market remains healthy. She added that policy is well-positioned and that the Fed will need to monitor the data. Bostic reiterated that he doesn’t expect the Fed to cut rates before Q4, adding that while rates are restrictive, the efficacy of policy could be weaker. Bostic stressed that with regards to the most recent inflation data, “one number is not a trend.” Goolsbee speaks today.

Financial conditions continue to loosen. They have loosened four straight weeks through Friday May 10 and are the loosest since mid-January 2022. This simply does not square with Fed comments that policy is restrictive. With equities higher and yields lower last week, we expect to get another week of loosening when the May 17 data are reported today.

Housing sector data will remain in focus. April existing home sales are expected at 0.8% m/m vs. -4.3% in March. New home sales will be reported tomorrow and are expected at -2.1% m/m vs. 8.8% in March.


ECB officials to continue laying the groundwork for a June cut. Lagarde said “I’m really confident that we have inflation under control. The forecast that we have for next year and the year after that is really getting very, very close to target, if not at target. So, I am confident that we’ve gone to a control phase.” Lagarde added that if the data reinforce the ECB’s confidence, a June cut seems very likely. Rehn said there was a strong case to begin easing in June. However, Nagel tempered expectations of additional policy rate cuts beyond June warning “we should not cut rates hastily and jeopardize what we have achieved.” After June, the market sees around 80% odds for cuts in September and December.

U.K. April CPI ran a little hotter than expected. Headline came in at 2.3% y/y vs. 2.1% expected and 3.2% in March, core came in at 3.9% y/y vs. 3.6% expected and 4.2% in March, and CPIH came in at 3.0% y/y vs. 2.8% expected and 3.8% in March. Headline is the lowest since July 2021 and edging closer to the 2% target. However, services inflation came in at 5.9% y/y vs. 5.4% expected and 6.0% in March. Of note, we will get the May CPI report right before the June 20 BOE decision.

The start of the Bank of England easing cycle has been pushed out. Overall, persistent services inflation suggests the BOE will wait longer before cutting the policy rate. Moreover, the BOE will look through regulated energy price base effects and wait for clearer signs of persistent disinflation before easing. Odds of a June cut are now around 15% vs. 55% at the start of this week, while odds of an August cut are now around 50% vs. fully priced in at the start of this week. This upward adjustment to U.K. interest rate expectations supports a firmer GBP, particularly versus EUR. Breeden speaks later today.


The 10-year JGB yield moved above the key 1% level. Recall that since October 2023, 1% has been a soft ceiling under more flexible Yield Curve Control rather than a strict ceiling, with the BOJ pledging to act “nimbly” to maintain smooth market operations. However, this is the first time that the 10-year yield has breached that level since 2013 and signals growing confidence that the BOJ will continue to normalize policy. Yet rising JGB yields have not prevented the yen from weakening, with USD/JPY trading at the highest since May 15 near 156.50. Break above 157 sets up a test of the April high near 160.15.

Japan reported April trade data. Exports came in at 8.3% y/y vs. 11.0% expected and 7.3% in March, while imports came in at 8.3% y/y vs. 8.9% expected and -5.1% in March. Export growth seems to be leveling off even as import growth accelerates. This bears watching, as net exports were a big hit to growth in Q1.

Japan also reported March core machine orders. Orders came in at 2.7% y/y vs. 1.4% expected and -1.8% in February. This was the first y/y gain since February 2023 but was flattered by low base effects.

Reserve Bank of New Zealand delivered a hawkish hold. It kept rates steady at 5.5%, as expected. However, “the Committee discussed the possibility of increasing the OCR at this meeting” and “agreed that interest rates may have to remain at a restrictive level for longer than anticipated in the February Monetary Policy Statement.” Indeed, the updated projections have the OCR peaking at 5.65% in Q4 2024 vs. 5.60% in Q3 2024 previously, with the first OCR cut penciled in for Q3 2025 vs. H1 2025 previously. The higher outlook for the OCR reflects the more gradual decline in inflation towards 2%. Of note, the RBNZ revised up its estimate of the nominal long-run neutral interest rate to 2.75% from 2.50%, suggesting policy may be less restrictive than previously assumed.

The post-meeting press conference generated some volatility. Governor Orr said raising the OCR today had been a “real consideration.” However, Chief Economist Conway downplayed the risk of a rate hike by December warning that interpreting the OCR rath path forecasts is “spurious.” NZD/USD pared back most of its post-decision gains as the swaps market continues to position for easing this year. Odds of an October cut have fallen below 50% vs. fully priced at the start of this week. A December cut is fully priced in, which sounds about right in our view.

Bank Indonesia kept rates steady at 6.25%, as expected. Governor Warjiyo said the bank remains watchful of the implications of high U.S. rates, as BI expects the Fed to cut rates towards year-end. He added that geopolitical tensions are another risk to consider, stressing “Such conditions demand a strong policy response to mitigate the adverse impact of global spillovers, including in Indonesia.” Warjiyo said policy will remain “data dependent.” If the rupiah remains relatively firm, then rates have likely peaked.

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