Dollar On Firm Footing

April 02, 2024

Dollar On Firm Footing

  • The US JOLTS is today’s data highlight and there are plenty of Fed speakers.
  • The recovery in UK housing market activity hit a speedbump in March.
  • The RBA March meeting minutes confirmed the bank no longer has a tightening bias.

USD and Treasury yields are holding on to yesterday’s gains triggered by a solid US March ISM manufacturing print. US manufacturing activity expanded for the first time since September 2022 and the prices paid component rose further into inflationary territory.

The strength of the US economy and sticky underlying inflation mean the Fed can afford to stay on the sidelines for longer than is currently discounted by the money market. Fed funds futures imply 62% odds of a first 25bps cut in June and a total of 68bps of easing this year. We expect USD to benefit further from a reassessment in Fed funds rate expectations.

The US February Job Openings and Labor Turnover Summary (JOLTS) is today’s data highlight (3:00pm London). US job openings are anticipated to continue trending lower in February but not enough to lead to a higher unemployment rate. The job opening rate fell from a high of 7.4% in March 2022 to 5.3% in January 2024. According to research by Fed Governor Christopher Waller the job opening would need to fall below 4.5% to see a significant increase in the unemployment rate.

There are plenty of Fed speakers today. Fed Governor Michelle Bowman talks on the implications of bank mergers, acquisitions, and de novo bank formation for the future of the banking system (3:10pm London); New York Fed President John Williams moderates a discussion with Jeremy Siegel, professor of finance at the Wharton School (5:00pm London); Cleveland Fed President Loretta Mester (voter) gives remarks on the economic outlook (5:05pm London); and San Francisco Fed President Mary Daly (voter) participates in a fireside chat (6:30Pm London).

EUR/USD is heavy around 1.0730. The ECB’s February consumer inflation expectations survey (9:00am London) will likely reinforce the case for a June policy rate cut (93% priced-in). Three-year ahead inflation expectations are expected to ease to 2.4% in February from 2.5% in January. Meanwhile, Germany’s March CPI data (1:00pm London) will offer a preview of Thursday’s Eurozone March CPI print. German EU harmonized inflation is anticipated to slow at an annual pace of 2.4% in March from 2.7% in February. Softer than expected inflation in France, Spain and Italy points to downside risk to German inflation.

GBP/USD is range-bound near recent lows around 1.2545. GBP ignored cooler UK shop prices and lower house prices. UK BRC shop price inflation eased sharply to 1.35% y/y in March (consensus: 2.2%), lowest since December 2021. Shop price disinflation are unlikely to convince the BOE to move early with policy rate cuts. The BOE is more concerned with high and sticky services inflation. The recovery in UK housing market activity hit a speedbump in March as Nationwide house prices unexpectedly fell by 0.2%/mth (consensus: +0.3%) to be up 1.6% year-over-year from 1.2% in February.

The UK February money and credit data is up next (9:30am London). Demand for credit in January pointed to a recovery in consumer spending activity. Net mortgage approvals for house purchases (an indicator of future borrowing) rose 7.2% m/m in January and net consumer credit growth quickened at an annual pace of 8.9% in January (the most since August 2018).

AUD/USD is holding under 0.6500. The RBA March meeting minutes confirmed the bank no longer has a tightening bias. Unlike at the February RBA policy meeting, there was no discussion on whether to raise the cash rate target at the March meeting. Instead, “members agreed that it was appropriate to characterise the policy outlook as one in which it was difficult to either rule in or out future changes in the cash rate target”. RBA cash rate futures continue to imply a little less than 50bps of policy rate cuts in 2024.

USD/JPY remains contained under 152.00. Japanese Finance Minister Shunichi Suzuki warned again he “won’t rule out any option against excessive FX moves”. The BOJ last officially intervened to stem JPY weakness between September and October 2022. In our view, it’s only a matter of time before USD/JPY breaks higher because we anticipate a gradual BOJ tightening process and a more muted than currently priced-in Fed easing cycle. The next major technical resistance for USD/JPY after the 151.95-152.00 zone is not before 160.00 (April 1990 high).

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