Dollar Firm as Fed Repricing Continues

May 18, 2023
  • Fed easing expectations continue to cool; regional Fed surveys for May will continue rolling out; weekly claims data will be important
  • ECB officials remain concerned about core inflation; BOE Governor Bailey said its balance sheet would not return to its pre-GFC levels; BOE tightening expectations have picked up
  • Japan reported soft April trade data; Australia reported soft April jobs data; Treasury forecasts New Zealand will avoid a recession

The dollar is trading firm as Fed easing bets are pared back further. DXY is trading higher for the third straight day near 103.172. It is on track to test the late March high near 103.357 but we have our eyes set on the mid-March high near 105.103. The euro is trading at a new low for this move near $1.08 and is nearing a test of the April 3 low near $1.0790. After that is the late March low near $1.0715 and a break below that would set up a test of the mid-March low near $1.0515. Sterling is trading lower near $1.2445 and testing the May 2 low near $1.2435. Break below sets up a test of the April 21 low near $1.2365 and then the April 3 low near $1.2275. The USD/JPY rally continues and is trading at a new high for this move near 138. The pair remains on track to test the November 30 high just below 140. Banking sector concerns and dovish market pricing for Fed policy have been the two major negative headwinds on the dollar. Recent data suggest low risks of systemic problems and so we believe the dollar has likely put in a near-term bottom. However, we need significant repricing of Fed policy in order to see the next big leg higher for the greenback. That process is finally picking up steam (see below) and is a big part of the dollar strength this week.


Fed easing expectations continue to cool. Two cuts by year-end are still priced in, with odds of a third now less than 10% vs. 33% yesterday, 50% Tuesday, and 100% at the start of this week. More importantly, WIRP suggests nearly 25% odds of another 25 bp hike in June. We believe that the start of the Fed repricing has been a major factor behind this week’s dollar strength but we still have a long way to go until rate cuts are totally priced out this year. Jefferson, Barr, and Logan speak today.

Regional Fed surveys for May will continue rolling out. Philly Fed business outlook is expected at -20.0 vs. -31.3 in April. The manufacturing is slowing but that is a global phenomenon, as services sector strength is proving to underpin growth all around the world. The Atlanta Fed’s GDPNow model is currently tracking 2.9% SAAR growth for Q2, up from 2.6% previously and up from the initial 1.7% reading and 1.1% in Q1. Next model update comes next Friday. Bloomberg consensus currently sees Q2 at 0.1% SAAR and Q3 at -0.6% SAAR. Existing home sales will be reported and expected at -3.2% m/m vs. -2.4% in March. April leading index will also be reported Thursday and expected at -0.6% m/m vs. -1.2% in March.

Weekly claims data will be important. That’s because initial claims data will be for the BLS survey week containing the 12th of the month. They are expected at252k vs. 264k last week, which was the highest since late October 2021 and perhaps another sign that the labor market is softening. Perhaps. Late last week, reports emerged that fraudulent initial claims in Massachusetts were behind the recent uptick. That state reported a 6,375 rise that accounted for almost half of the 13,969 rise in total unadjusted claims nationwide last week. Continuing claims are reported with a one-week lag and are expected at 1.820 mln vs. 1.813 mln last week. Of note, there is no Bloomberg consensus yet for May NFP but we would expect some slowing from 253k in April.


ECB officials remain concerned about core inflation. Guindos said he’s very concerned about accelerating inflation in service industries and reiterated that the ECB is focused on core inflation as a key indicator of underlying price pressures. Specifically, he said “Services are performing better than manufacturing and that´s why for example countries where services are important, such as Italy or Spain, are growing more than Germany or the Netherlands. The momentum of the underlying trend is accelerating.” WIRP suggests a 25 bp hike is nearly priced in for June 15 and about 70% for a second 25 bp July 27. That hike is fully priced in September 14 and the market is starting to price in low odds of a third 25 bp hike. The split between the hawk and the doves clearly remains in place but it feels like the doves have taken control of the narrative, at least for now.

Bank of England Governor Bailey said its balance sheet would not return to its pre-QE levels. Specifically he said “I do not envisage the balance sheet returning to what it was before the financial crisis” and that “The reason is the stock of reserves, the deposits banks make with us. That’s the highest form of bank liquidity. There is no question that the need for banks to hold larger cash reserves from a financial stability point of view is important.” The balance sheet was less than GBP100 bln before the financial crisis but grew to around GBP1 trln from pandemic-era purchases. It has since shrunk to around GBP880 bln after QT began. Bailey said the bank wants to reduce the size of its balance sheet further to give it room to restart QE in the future, if needed, but indicated that it will remain in the hundreds of billions of pounds.

Bank of England expectations have picked up. A 25 bp hike is nearly 80% priced in for June 22 and another 25 bp hike is about 75% priced in for September 21. Inflation remains stubbornly high and so the market now sees the terminal rate peaking near 5.0% vs. 4.75% before last week’s meeting. Pill also speaks today. The U.K. also reports May GfK consumer confidence and is expected at -27 vs. -30 in April.


Japan reported soft April trade data. Exports came in at 2.6% y/y vs. 3.0% expected and 4.3% in March, while imports came in at -2.3% y/y vs. -0.6% expected and 7.3% in March. Both are the weakest since early 2021. While the drop in imports largely reflects falling energy prices, export weakness is of more concern as China reopening has simply had little impact on regional trade and activity.

Australia reported soft April jobs data. There were -4.3k jobs lost vs. 20.0k expected and a revised 61.1k (was 53.0k in March), while the unemployment rate rose two ticks to 3.7%. The mix was not good as -27.1k full-time jobs lost were not fully offset by a 22.8k gain in part-time jobs. This is to be expected after 375 bp of tightening as well as the disappointing impact of China reopening. We know that the RBA is hoping to minimize job losses and so we suspect that it will remain on hold for now. Next meeting is June 6 and no change is expected then. Looking ahead, WIRP suggests odds of another 25 bp hike top out around 24% for August 1, while an easing cycle has been pushed out to early 2024.

The Treasury Department forecasts New Zealand will avoid a recession. In its budget, Treasury sees growth at 1% in the fiscal year ending June 2024, with growth seen in every quarter. This is an upgrade from December’s fiscal update that forecast three consecutive quarters of contraction. Treasury noted that “The rebuild following the North Island weather events, a quicker return of tourism and less-contractionary fiscal policy are going to offer more support to the economy than anticipated. While we no longer anticipate a technical recession during 2023, growth remains low and labor market conditions will begin to deteriorate.” Treasury acknowledged that fiscal policy will be expansionary in the next fiscal year, adding “Weakness in economic demand over 2023 is expected to be less marked, which will translate into tighter monetary policy.” The RBNZ saw recession in its February forecasts but will publish updated forecasts next week along with its policy decision, which is widely expected to be a 25 bp hike to 5.5%. Looking ahead, WIRP suggests odds of another 25 bp hike top out around 85% for August 16.

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