Dollar Flat Ahead of ECB Decision

June 06, 2024
  • Recent data suggest the US economy is slowing but there are clearly still pockets of strength; ADP private sector jobs reading was soft; ISM services PMI for May ran hot; BOC cut rates 25 bp to 4.75%, as expected; Governor Macklem was cautious; Canada reports May Ivey PMI
  • ECB meeting ends shortly and a 25 bp cut is widely expected; soft eurozone data support the case for the ECB easing sooner rather than later; BOE released its May Decision Maker Panel survey
  • BOJ board member Nakamura remains dovish; Australia reported soft April trade data and firm lending data; Taiwan rates have likely peaked

The dollar is trading sideways ahead of the ECB decision. DXY is trading flat near 104.244 and has been rangebound between 104-105 since mid-May. The euro is trading higher near $1.0875 ahead of a widely expected cut by the ECB (see below), while sterling is trading lower near $1.2780. The yen is trading flat just above 156 despite dovish BOJ comments (see below). Despite the recent mixed data, we believe the backdrop of persistent inflation and robust growth in the U.S. remains largely in place. Markets have taken back the dovish Fed easing expectations, while the Bank of Canada rate cut yesterday (see below) underscored the widening monetary policy divergences that support the U.S. dollar.


Recent data suggest the US economy is slowing but there are clearly still pockets of strength. Yes, Q1 and Q2 growth have likely slowed below 2% SAAR, while job growth and job openings suggest a less right labor market. Consumption also seems to be slowing and yet the ISM services PMI for May (see below) points to ongoing strength in a key sector for the U.S. Price pressures have cooled but remain well above the Fed’s target even as financial conditions remain quite loose. As a result, we still don't think the Fed is in any rush to cut rates. The market seems to agree and sees the first cut priced in for November. However, the odds of a September cut have risen to around 80% vs. 50% at the end of May. Tomorrow’s jobs report will be very important but next week’s FOMC meeting is even more important.

ADP private sector jobs reading was soft. Headline came in at 152k vs. 175k expected and a revised 188k (was 192k) in April. This comes ahead of the jobs report tomorrow. Bloomberg consensus sees 185k jobs added vs. 175k in April, while its whisper number has fallen to 168k vs. 189k at the start of this week. It’s worth noting that before the April miss, NFP had outperformed ADP eight straight months. Elsewhere, the unemployment rate is expected to remain steady at 3.9%. With the supply of workers and the demand for labor coming into better balance, the pace of wage growth will probably be a bigger driver of U.S. interest rate expectations. Average hourly earnings are forecast to rise 0.3% m/m vs. 0.2% in April whilst remaining steady at 3.9% y/y.

ISM services PMI for May ran hot. Headline came in at 53.8 vs. 51.0 expected and 49.4 in April. This is the highest since August 2023, while the activity reading of 61.2 is the highest since November 2022. Prices paid came in at 58.1 vs. 59.2 in April, which is welcome news for the Fed. Employment came in at 47.1 vs. 45.9 in April, but this subcomponent has been understating job growth in the service sector all year.

Q2 growth remains solid. The Atlanta Fed’s GDPNow model is tracking Q2 growth at 1.8% SAAR and will be updated today after the April trade data, where a -$76.5 bln deficit is expected. Elsewhere, the New York Fed’s Nowcast model is tracking Q2 growth at 1.8% SAAR and will be updated tomorrow. It should also release its first estimate for Q3 growth tomorrow.

Other labor market data will be reported today. May Challenger job cuts and weekly jobless claims will be reported. Initial claims are expected at 220k vs. 219k last week, while continuing claims are expected at 1.790 mln vs. 1.791 mln last week. Final Q1 nonfarm productivity and unit labor costs will also be reported.

Bank of Canada cut rates 25 bp to 4.75%, as expected. The bank noted that “recent data has increased our confidence that inflation will continue to move towards the 2% target” and that “if inflation continues to ease, and our confidence that inflation is headed sustainably to the 2% target continues to increase, it is reasonable to expect further cuts to our policy interest rate.” However, the BOC tempered expectations of back-to-back interest rate cuts by warning that “if we lower our policy interest rate too quickly, we could jeopardize the progress we’ve made.” Furthermore, the bank emphasized “we are taking our interest rate decisions one meeting at a time.”

Governor Macklem was cautious in his press conference. He stressed that the path of interest rates is likely to be gradual, adding that the timing of cuts depends on incoming data. Macklem said rates probably won’t fall to pre-COVID levels, adding that Canada still needs restrictive policy. The BOC will not release updated forecasts until the July 24 meeting. A July rate cut is 60% priced in while September is fully priced in. Bottom line: monetary policy divergence supports the downtrend in CAD versus AUD, NZD, and NOK. Unlike the BOC, the RBA, RBNZ and Norges Bank are in no rush to loosen policy.

Canada reports May Ivey PMI. Yesterday, S&P Global services and composite PMIs came in firm at 51.1 and 50.6, respectively. The composite reading rose above 50 for the first time since May 2023.


European Central Bank meeting ends shortly and a 25 bp cut is widely expected. However, the tone of the post-meeting press conference and the updated macroeconomic projections will likely further dampen expectations that the ECB is about to embark on an aggressive easing cycle. Eurozone services inflation remains sticky above 4% y/y and leading indicators point to a modest improvement in economic activity.  However, it’s worth noting that the odds of a second hike in September have recovered to 80% vs. 50% at the start of this week, while a third hike in December is also about 80% priced in. As always, President Lagarde’s press conference will be key in setting market expectations.

Soft eurozone data support the case for the ECB easing sooner rather than later. Germany reported soft April factory orders. Orders came in at -1.6% y/y vs. 0.3% expected and a revised -2.4% (was -1.9%) in March. Germany reports April IP and trade data tomorrow, with IP expected at -3.0% y/y vs. -3.3% in March.

Industry is recovering modestly. Spanish April IP came in at 0.8% y/y vs. 0.6% expected and a revised -1.3% (was -1.2%) in March. Yesterday, France reported April IP at 0.9% y/y vs. 0.7% expected and actual in March.

Consumption remains relatively weak. Both Italy and eurozone reported soft April retail sales data. Italy came in at -1.9% y/y vs. a revised 1.9% (was 2.0%) in March, while eurozone came in flat y/y vs. 0.2% expected and 0.7% in March.

Bank of England released its May Decision Maker Panel survey. inflation expectations remain contained. 1- and 3-year ahead inflation expectations remained steady at 2.9% and 2.6%, respectively. Importantly, the BOE will welcome signs of easing wage pressures, as expected year-ahead wage growth fell by 0.3 ppt to 4.5% on a three-month moving-average basis in May. We believe the DMP survey supports the case for a September policy rate cut, where the market sees 75% odds vs. 50% at the end of May.


Bank of Japan board member Nakamura was dovish. Nakamura noted it was appropriate to maintain current monetary policy settings for the time being as he’s still not confident about the sustainability of wage growth. Nakamura is a staunch BOJ dove, so his comments are not surprising. Nakamura voted against normalizing policy in March. That said, the dovish forward guidance from most BOJ officials has the market looking for a very modest tightening cycle. Nakamura also said, “I think it’s appropriate to proceed with a reduction over time in preparation for the exit depending on the state of economic recovery,” which jibes with recent reports suggesting the BOJ will consider trimming its bond-buying at next week’s policy meeting.

Australia reported soft April trade data. Exports came in at -2.5% m/m vs. a revised -0.6% (was 0.1%) in March, while imports came in at -7.2% m/m vs. 4.2% in April. The data suggests domestic and external demand are both slowing. In y/y terms, exports improved to -5.9% vs. -11.6% in March and imports worsened to 2.0% vs. 11.5% in March.

Australia reported firm lending data that reinforces the RBA’s patient guidance before easing. The value of new housing loans commitments rose 4.8% m/m in April vs. 1.5% expected and a revised 3.8% (was 3.1%) in March. The increase in the value of new home loans was driven by strength in both owner-occupier (4.3% m/m) and investors (5.6% m/m).

Taiwan rates have likely peaked. After May CPI data today, central bank Governor Yang said “CPI, core CPI, important staples prices, and commonly purchased items prices are gradually falling.” Headline came in at 2.24% y/y vs. 2.10% expected and a revised 1.94% (was 1.95%), while core came in at 1.84% y/y vs. 2.0% expected and 1.81% in April. While the bank does not have an explicit inflation target, the data should keep the bank on hold when it meets next Thursday. However, the swaps market still sees some odds of one more hike over the next year. Lastly, Yang noted that “The economy is recovering but it’s not very strong.”  

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