Dollar Rally Continues Ahead of FOMC Decision

March 20, 2024
  • The global impact of BOJ liftoff has so far been limited; the FOMC decision comes out this afternoon; updated macro forecasts will be key; Powell’s press conference brings the most risk of a surprise; BOC releases its Summary of Deliberation for the March 6 policy decision; Brazil is expected to cut rates 50 bp to 10.75%
  • ECB President Lagarde is trying to keep markets guessing; U.K. reported soft February CPI; we doubt the BOE will be in a rush to loosen policy; Czech Republic is expected to cut rates 50 bp to 5.75%
  • Moody’s said the BOJ pivot poses limited risks to Japan’s credit outlook; New Zealand reported Q4 current account data; China’s commercial banks kept LPRs steady; Indonesia kept rates steady at 6.0%, as expected

The dollar continues to gain ahead of the FOMC decision this afternoon. DXY is trading higher for the fifth straight day near 104.117, the highest since March 1. Clean break above 103.976 sets up a test of the February 14 high near 105. The yen continues to underperform, with USD/JPY trading at a new cycle high near 151.75. Break of the November high near 152 opens up further losses and will raise intervention risks. The euro is trading lower near $1.0840 while sterling is trading lower near $1.27 after soft CPI data (see below). We embrace this dollar recovery and believe further gains are likely if the Fed sticks to its hawkish script today (see below). The U.S. data continue to come in mostly firmer and despite Powell’s recent dovish testimony before Congress, most Fed officials remain very cautious about easing too soon. We believe that the current market easing expectations for the Fed still need to adjust. When they do, the dollar should gain further. Last week’s inflation data sparked the start of this process and the FOMC decision today will be key for the continuation of this move.


The global impact of Bank of Japan liftoff has so far been limited. The past year, conventional wisdom thought that sharply higher JGB yields after liftoff would lead to capital repatriation from Japanese investors that had gone abroad to chase higher yields. That rotation out of the U.S. (and others) would theoretically add to upward pressure on global yields. However, this hasn't happened yet either and so the worst-case scenarios from BOJ liftoff have so far been avoided.

The FOMC decision comes out this afternoon. The Fed is widely expected to keep interest rates unchanged and begin in-depth discussions about slowing the pace of its balance sheet runoff that’s currently running at $95 bln/month. While the Fed delivered a hawkish hold in January followed by consistently hawkish official comments, Powell’s dovish testimony before Congress recently raises some risks that the Fed’s policy statement is tweaked to signal greater confidence that inflation is moving sustainably towards 2%.

Updated macro forecasts will be key. Growth and inflation forecasts are likely to be raised, reflecting the current macro backdrop of sticky inflation and a resilient economy and labor market. However, it’s the Dot Plots that will command the most attention and we see risks of a hawkish shift. We've noted before that it would take only two FOMC members to shift their 2024 Dot from 4.625% to 4.875% to move the Fed median in a similar manner. Looking ahead, it would take just three FOMC members to shift their 2025 Dot from 3.625% to 3.875% to get a similarly hawkish shift in the Fed median. Given the current economic outlook, it’s hard to justify 175 bp of total easing in 2024 and 2025 that’s currently implied by the Dots.

Chair Powell’s press conference brings the most risk of a surprise. Will he reprise the hawkish tone of his January press conference? Or will he repeat his more dovish testimony before Congress earlier this month? We expect the former but there are significant risks of the latter. If he stays hawkish, the dollar rally should continue. Stay tuned.

The Bank of Canada releases its Summary of Deliberation for the March 6 policy decision. Recall that the BOC kept rates steady at 5.0% then but tempered expectations of an aggressive easing cycle. The Monetary Policy Decision Press Conference Opening Statement warned that “it’s too early to loosen the restrictive policy” while BOC Governor Macklem emphasized the bank “won’t be lowering rates at the pace we raised them.” However, Canada’s soft February CPI print leaves the door open for earlier than anticipated rate cuts. The market has raised the odds of a 25 bp rate cut by June to nearly 95% from 50% earlier this week.

Brazil COPOM is expected to cut rates 50 bp to 10.75%. If so, this would amount to 200 bp of cumulative rate cuts since the easing cycle started in August 2023. At the last COPOM meeting, the central bank cut rates 50 bp to 11.25% and said that pace of easing would be maintained over the next meetings. Headline consumer inflation is on a solid disinflationary path and at the upper end of the bank’s 1.5% to 4.5% inflation target range. Of note, the swaps market is pricing in 150 bp of total easing over the next six months that would see the policy rate bottom near 9.75%.


ECB President Lagarde is trying to keep markets guessing. While she has implied June will see the first cut, Lagarde said “Our decisions will have to remain data dependent and meeting-by-meeting, responding to new information as it comes in. This implies that, even after the first rate cut, we cannot pre-commit to a particular rate path.” Recently, Stournaras suggested the ECB could cut rates twice before the summer break and twice after. The market sees the first cut coming in June, followed by cuts in September, October, and possibly December. This seems about right to us.

U.K. reported soft February CPI. Headline came at 3.4% y/y vs. 4.0% in January, core came in at 4.5% y/y vs. 5.1% in January, and CPIH came in at 3.8% y/y vs. 4.2% in January. All were a tick lower than expected, and headline was the lowest since September 2021 but still well above the 2% target. The data come just a day ahead of the Bank of England decision, where a hold is widely expected.

We doubt the BOE will be in a rush to loosen policy as services inflation remains too high. In line with the BOE’s forecast, services inflation eased to 6.1% y/y vs. 6.0% expected and 6.5% in January. The first 25 bp rate cut remains more than fully priced in by the markets for August, followed by another two before year-end. Bottom line: GBP has scope to edge higher versus EUR.

Czech National Bank is expected to cut rates 50 bp to 5.75%. Vice Governor Eva Zamrazilova has cautioned that she’s “not considering any jumbo cuts,” suggesting a larger move is unlikely. At the last policy meeting February 8, the Czech National Bank delivered a dovish surprise and cut rates 50 bp to 6.25% vs. 25 bp expected. Since then, inflation fell to the bank’s 2% target in February. The swaps market is pricing in 225 bp of rate cuts over the next 12 months followed by another 50 bp over the subsequent 12 months that would see the policy rate bottom around 3.5%. Bottom line: real rates will likely remain positive and supportive of CZK.


Moody’s said the BOJ pivot poses limited risks to Japan’s credit outlook. We concur. The agency noted that “The marginal increase in the policy rate will have a negligible impact on the government’s ability to service its very large debt burden given the largely fixed-rate nature and relatively long maturity profile of its debt stock.” We believe that all the leaks and jawboning by the BOJ ahead of the decision helped it to avoid (for now) the undesirable outcomes of a sharply stronger yen and sharply higher JGB yields that could come after liftoff and the end of YCC. Of course, the strong dollar probably helped prevent a surge in the yen and so a little luck was involved. Lastly, the dovish forward guidance by Ueda and company has helped keep market reaction muted and so for that, we tip our hat to them. The swaps market is pricing in only 35 bp of tightening over the next year, followed by another 15 bp over the subsequent year.

New Zealand reported Q4 current account data. The deficit came in at -6.9% of GDP vs. -7.0% expected and a revised -7.4% (was -7.6%) in Q3. Nevertheless, the current account deficit remains high by historical standards, suggesting NZD needs to keep trading at a discount to its fundamental equilibrium in order to attract foreign investment to finance this deficit.

China’s commercial banks set their Loan Prime Rates. The 1- and 5-year LPRs were kept steady at 3.45% and 3.95%, respectively. This was no surprise as the PBOC kept its key 1-year MLF at 2.5% last week but drained liquidity for the first time since November 2022. Monetary policy has pretty much reached the limits of what it can do in this deflationary environment and so any further easing is likely to be modest. Bottom line: the 5% growth target for this year will be very difficult to meet.

Bank Indonesia kept rates steady at 6.0%, as expected. Governor Warjiyo said rates would be kept steady to help support the rupiah, adding that cuts will only be considered in H2, when Bank Indonesia expects the Fed to cut. He said the bank will continue intervening in the FX and bond markets and noted that “Going forward, the rupiah is predicted to be stable with a tendency to strengthen supported by BI’s stabilization measures.” Bloomberg consensus sees steady rates through H1 followed by 50 bp of easing in Q3 followed by another 25 bp in Q4. Rates are seen bottoming at 4.75% in 2025.

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