Dollar Gets Some Traction Ahead of Long Weekend

May 27, 2022

U.S. rates markets are pricing in increasing odds of a U.S. recession; April core PCE will be the U.S. data highlight; the U.S. housing sector is softening and that's what rate hikes are supposed to do; the growing  imbalance means home prices need to fall and that should eventually lead to downward pressure on inflation; Banco de Mexico minutes were hawkish

Chancellor Sunak bowed to pressure and announced an aid package for U.K. households; BOE tightening expectations remain stalled

Japan reported softer May Tokyo CPI data; Australia reported firm April retail sales

The dollar is getting some limited traction ahead of the long weekend.  With U.S. markets closed Monday, there may be some month-end rebalancing flows helping the dollar today.  DXY is trading near 101.90 after earlier making a new low for this move near 101.433.  Clean break below 101.80 would set up a test of the April 21 low near 99.818.  The euro is trading back near $1.07 after trading at a new high for this move near $1.0765.  Here, a clean break above $1.0710 would set up a test of the April 21 high near $1.0935.  USD/JPY remains heavy near 127 as risk sentiment remains vulnerable.  Sterling is trading back below $1.26 after trading at a new high for this move near $1.2665.  Sterling should continue to underperform despite Sunak’s recent fiscal moves (see below).  We still view this recent move lower in the dollar as a correction within the longer-term dollar rally but acknowledge that further losses are possible until the market pessimism on the U.S. economic outlook improves (see below).  


U.S. rates markets are pricing in increasing odds of a U.S. recession.  Of note, the swaps market is pricing in a terminal Fed Funds rate of 3.0% vs. 3.75% in early May.  More importantly, it is now pricing in the start of an easing cycle sometime in the subsequent 12 months.  This would only be likely if the U.S. economy were to fall into recession next year.  While that is possible, it is not our base case.  As a result of the shifting expectations, U.S. yields continue to fall from the early May peaks.  The 10-year yield is currently trading near 2.74% vs. the May 9 peak near 3.20%,while the 2-year yield is trading near 2.47% vs. the May 4 peak near 2.85%.  The 2-year differentials with Germany, Japan, and the U.K. peaked in early May and have been moving lower, which has taken the expected toll on the dollar.  We continue to believe that recession fears are overblown but acknowledge that it may take some time for market sentiment to turn around.  Next week brings important PMI readings and the jobs report for May.  Perhaps it begins there.   

April core PCE will be the U.S. data highlight.  It is expected to ease to 4.9% y/y vs. 5.2% in March.  if so, it would be the second straight month of deceleration but still well above the Fed’s 2% target.  While this would be a welcome development, the Fed has made it clear that it will continue with its aggressive tightening over the next several meetings and so today’s data is unlikely to have much bearing on policy.  Personal income and spending will also be reported at the same time and are expected to rise 0.5% m/m and 0.8% m/m, respectively.  April advance goods trade (-$114.8 bln expected), wholesale and retail inventories, and final May University of Michigan consumer sentiment will also be reported. 

The U.S. housing sector is softening and that's what rate hikes are supposed to do.  Yesterday, April pending home sales fell -11.5% y/y vs. -7.6% expected and a revised -9.2% (was -8.9%) in March.  A year ago, everyone was talking about an unsustainable housing bubble and now concerns are rising because we are finally getting a correction.  This is not 2007 all over again, though.  Note that existing, new, and pending home sales are all contracting y/y.  On the other hand, housing starts rose 14.6% y/y, which suggests there is a growing glut of new supply just as demand is waning.  As it is, the supply of new homes jumped to 9.0 months in April, the highest since May 2010 and climbing.   

This imbalance means home prices need to fall and that should eventually lead to downward pressure on inflation.  The CPI utilizes the Owners’ Equivalent Rent (OER) and Rent components to capture housing costs and makes up nearly a third of the CPI basket.  From a recent White House study:  "Despite the fact that the PCE price index (the measure most closely tracked by the Federal Reserve) incorporates the CPI: Rent and CPI: OER price indices, housing makes up a far smaller share of PCE inflation, partly because PCE is broader in scope overall and partly because PCE uses a different methodology than CPI for weighting housing. On average, housing is 16% of headline PCE and 18% of core PCE." 

Banco de Mexico minutes were hawkish.  At that meeting, it hiked rates 50 bp to 7.0% by a 4-1 vote, with Deputy Governor Espinosa dissenting in favor of a 75 bp hike.  However, the minutes show that more policymakers were open to a larger move as another said it would reinforce the bank’s autonomy and have more impact on long-term inflation expectations.  However, that official acknowledged that it would surprise markets, “making it difficult to forecast the reference rate’s trajectory.”  A third policymaker said “extraordinary conditions, such as those being faced, may require extraordinary actions” and argued that “an unanchoring of expectations must be avoided by taking forceful actions.”  One of these two others is likely Deputy Governor Heath, who recently noted risks of a 75 bp move next month.  Next policy meeting is June 23 and the minutes suggest it will be a very close call between 50 and 75 bp.  The swaps market still sees 225 of tightening over the next 12 months that would see the policy rate peak near 9.25%. 


Chancellor Sunak bowed to pressure and announced an aid package for U.K. households.  The package totals GBP15 bln and includes the following one-off payments:  energy rebates of GBP400 to all households and GBP650 to 8 mln of the lowest income households, GBP300 to all pensioners, and GBP150 to all receiving disability benefits.  It will be financed in part by a 25% windfall tax on oil and gas companies that is projected to raise about GBP5 bln.  With energy prices expected to spike again in October when the household cap is adjusted, there will be pressure on Sunak to deliver even more in the months ahead but his actions come with a lot of risks attached.  While the aid to households will help support consumption and perhaps help stave off recession, it may add to already high price pressures.

Bank of England tightening expectations remain stalled.  WIRP suggests another 25 bp hike is priced in for the next meeting June 16.  Looking ahead, the swaps market is pricing in 150 bp of total tightening over the next 12 months that would see the policy rate peak near 2.50%, steady from the start of last week. BOE Chief Economist Pill said this week that the bank knows it needs to hike rates further but is wary of acting too quickly and pushing  the economy into recession.  The aid package that was just announced may give the bank more confidence to hike but that has not yet been reflected in market pricing.  Stay tuned. 


Japan reported softer May Tokyo CPI data.  Headline came in at 2.4% y/y vs. 2.5% expected and a revised 2.4% (was 2.5%) in April, while core (ex-fresh food) came in steady at 1.9% y/y vs. 2.0% expected and core ex-energy came in as expected at 0.9% y/y vs. 0.8% in April.  The basically steady readings are a bit surprising as low base effects from last year and current high energy prices are still at work.  If this is replicated in the national CPI data, BOJ officials will feel surely vindicated as they continue to look through this spike and maintain the current accommodative stance for the foreseeable future.  Next policy meeting is June 16-17 and all policy settings are expected to remain steady.   

Australia reported firm April retail sales.  They came in a tick lower than expected at 0.9% m/m vs. 1.6% in March, while the y/y rate picked up to 9.6% vs. 9.4% in March.  Looking ahead consumption should continue to be supported by a strong labor market that’s at full employment.  The economy remains robust even as price pressures continue to rise. However, there are growing concerns that a planned July 1 price hike in electricity prices will further crimp household budgets that are already getting squeezed from inflation and rising interest rates.  Stay tuned.  Another 25 bp hike June 7 is fully priced in, while the swaps market sees nearly 300 bp of tightening over the next 12 months that would see the policy rate peak near 3.25%, steady from the start of last week. 

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