Dollar On The Defensive

April 03, 2024

Dollar On The Defensive

  • The US ADP employment report and ISM services index are the data highlights. There are also plenty of Fed speakers, including Fed Chair Powell.
  • Today’s Eurozone March CPI print is projected to show the disinflationary process is well on track.
  • Inflation in Turkey is expected to quicken in March.

USD has retraced most of its ISM manufacturing index triggered gains from Monday. However, 2 and 10-year Treasury yields are holding firm near recent highs. This suggests the USD pullback is more technical rather than fundamentally driven. Indeed, yesterday’s US Job Openings and Labor Turnover Summary (JOLTS) remained indicative of resilient labour market conditions. In February, the job opening rate printed at 5.3% for a third consecutive month (which is still above the 4.5% threshold consistent with a significant increase in the unemployment rate) and the hiring rate ticked up 0.1pts to 3.7%.

Cleveland Fed President Loretta Mester and San Francisco Fed President Mary Daly delivered a similar message yesterday. Both see three rate cuts in 2024 as reasonable expectation but it’s too soon to pull the trigger and June can’t be ruled out. As such, the probability of a cut in May is almost zero but June is live with 68% odds. It will probably take a robust ISM services index and/or non-farm payrolls report to sustainably curtail the likelihood of a June rate cut.

There’s another good batch of Fed speakers today: Atlanta Fed President Bostic gives a TV interview (1:30pm London). Bostic is one of two officials who voted for 1 cut in 2024. Fed Governor Michelle Bowman talks on bank liquidity, regulation and the Fed's role as the lender of last resort (2:45pm London). Chicago Fed President Austan Goolsbee gives opening remarks (5:00pm London). Goolsbee is one of nine who voted for 3 cuts in 2024. Fed Chair Jay Powell speaks about the economic outlook (5:10pm London). Fed Vice Chair for Supervision Michael Barr discusses the Community Reinvestment Act (6:10pm London). Fed Governor Adriana Kugler speaks on the outlook for the US economy and monetary policy (9:30pm London).

The US ADP employment report (1:15pm London) and ISM services index (3:00pm London) are the data highlights. ADP private sector jobs is expected to rise by 150k in March versus 140k in February. Of note, non-farm payrolls has outperformed ADP for the past seven months. Meanwhile, the headline ISM services index is forecast to rise to 52.8 in March from 52.6 in February. Keep on eye on prices paid, which fell to 58.6 in February vs. 64.0 in January. Prices paid remains in inflationary territory and will keep the Fed cautious.

EUR/USD recovered towards 1.0780 from a multi-week low around 1.0725 yesterday. Nevertheless, narrowing EU-US long-term bond yield spreads can further weigh on EUR/USD. The Eurozone March CPI print is up next (10:00am London). Headline CPI inflation is forecast to slow to 2.5% y/y in March from 2.6% the previous month. Core CPI inflation is forecast to drop to 3% y/y in March from 3.1% in February. Cooler than anticipated inflation in the main Eurozone countries points to downside risk to Eurozone inflation.

USD/CNH is trading in tight range around 7.2500. In line with consensus, China’s services and compositive Caixin PMI rose 0.2pts in March to 52.7. Overall, China’s official and Caixin PMIs suggest the economy is gaining growth traction which bodes well for the commodity complex. Regardless, until the nation’s huge debt overhang is addressed, it’s hard for us to get excited about a modest cyclical upturn.

Turkey reports March CPI today (8:00am London). Headline is expected at 69.05% y/y vs. 67.07% in February and core is expected at 75.19% y/y vs. 72.89% in February. If so, headline would be the highest since November 2022. At the last policy meeting March 21, the bank delivered a hawkish surprise and hiked rates 500bps to 50.0% vs. no change expected. With inflation still accelerating, the central bank is playing some catchup but more likely needs to be done. Indeed, high inflation was likely one of the major factors behind Erdogan’s AKP’s defeat to opposition CHP in weekend municipal elections.

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