Dollar Remains Under Pressure Ahead of PPI Data

January 13, 2022

The Fed continues to flag potential March liftoff; Fed Beige Book report is worth discussing; Senate Banking Committee holds its hearing today on Lael Brainard’s nomination for Vice Chair; U.S. PPI data will be in focus today
The U.K. inflation outlook continues to worsen; this complicates the Bank of England’s task at hand
Tokyo raised its COVID alert to the second-highest level as virus numbers jump

The dollar remains under pressure ahead of PPI data. DXY is down for the third straight day and trading at the lowest level since November 10 near 94.713. Charts point to a test of the November 9 low near 93.875. The euro in on track to test its November 9 high near $1.1610, while sterling is leading this move and is on track to test its October 20 high near $1.3835. It is testing the 200-day moving average near $1.3740 currently. USD/JPY is lagging but a break below 114.35 would set up a test of the December 17 low near 113.15. This dollar move is a bit surprising to us because some of the technical indicators were signaling an oversold dollar in recent days. With the Fed turning more hawkish and inflation still accelerating, this was what we thought to be one of those nice situations where the technicals and fundamentals were both lined up for a dollar bounce. That said, we’re not ready to throw in the towel on a stronger dollar yet as DXY is still trading within the well-worn 94-97 trading range that has held since November.

AMERICAS

The Fed continues to flag potential March liftoff. Yesterday, Bullard said a March hike is “very likely” and that four hikes this year now appear likely. WIRP suggests nearly 95% odds of liftoff at the March 15-16 FOMC meeting, while a fourth hike is nearly 60% priced in. We don't think it's any coincidence that the loudest hawks this year (Bullard, Mester, George) are all voters. That said, they wouldn't be saying this without being simpatico with the rest of the FOMC. Barkin and Evans speak today, followed by Williams tomorrow. At midnight tomorrow, the media blackout goes into effect and we will get no more Fed speakers until Chair Powell’s post-decision press conference January 26.

The Fed Beige Book report is worth discussing. It noted that “Contacts from most Federal Reserve districts reported solid growth in prices charged to customers, but some also note that price increases had decelerated a bit.” Of note, 10 of the 12 Fed districts said the omicron variant was affecting activity and adding to existing labor market challenges. Also, “Optimism remained high but waned somewhat, as the share of firms expressing positive expectations for continued economic growth over the next six months narrowed.” The tone seems to be a bit more cautious, which of course is warranted given the quick spread of omicron in the U.S. That said, it’s clear from the tone of Fed speakers that the Fed is pretty much looking through the variant and ready to hike rates sooner rather than later. This Beige Book report was based on information collected through January 3 and compiled by the Federal Reserve Bank of Kansas City.

The Senate Banking Committee holds its hearing today on Lael Brainard’s nomination for Vice Chair. In her prepared remarks released ahead of time, Brainard said ““Inflation is too high, and working people around the country are concerned about how far their paychecks will go. Our monetary policy is focused on getting inflation back down to 2% while sustaining a recovery that includes everyone. This is our most important task.” This is pretty much boilerplate language for the Fed now. If approved by the Committee, both she and Powell would go before the full Senate for final confirmation.

U.S. PPI data will be in focus today. Headline is expected at 9.8% y/y vs. 9.6% in November, while core (ex-food and energy) is expected at 8.0% y/y vs. 7.7% in November. Both would be cycle highs and would underscore the fact that pipeline price pressures remain high. With firm pricing power strong, this will likely lead to pass-through to consumer and should keep the Fed concerned about further CPI acceleration. Yesterday, December CPI came in close to expectations, with headline at the expected at 7.0% y/y vs. 6.8% in November and core (ex-food and energy) a tick higher than expected at 5.5% y/y vs. 4.9% in November. Both are multi-decade highs. There are no policy implications as the Fed knows it's behind the curve and is acting accordingly now with an accelerated pace of removing accommodation. Weekly jobless claims will also be reported, with initial claims expected at 200k and continuing claims at 1.733 mln.

EUROPE/MIDDLE EAST/AFRICA

The U.K. inflation outlook continues to worsen. Besides the expected spike in energy bills this spring, households will also have to deal with increased phone charges. Reports suggest that the four U.K. mobile network operators are planning sizeable increases in their monthly charges, with some estimates of more than 10%. While some industry analysts say the increases are justified in order to cover the costs of network upgrades and such, the timing couldn’t have been worse for the Johnson government. Households are facing higher payroll taxes, higher energy costs, and now higher mobile phone costs, all of which will eat into discretionary spending and slow the economy.

This complicates the Bank of England’s task at hand. Central banks tend to look past such one-off events, focusing instead on generalized price increases. Yet these higher mobile charges would come even as CPI inflation is running above 5% (and rising), making it hard for the BOE to ignore. The task is made more difficult by the rising headwinds to U.K. growth this year. WIRP suggests a BOE hike February 3 is nearly 90% priced in, followed by hikes at every other meeting this year that would take the policy rates to 1.25% at year-end. This rate outlook has helped sterling outperform, as it is up 1.6% YTD and behind only NOK (1.8% YTD) within the majors.

ASIA

Tokyo raised its COVID alert to the second-highest level as virus numbers jump. Daily new cases rose above 2,000 for the first time since early September. It’s not just Tokyo, with Osaka also seeing a jump in daily new cases to around 2,000. This comes just as the Bank of Japan upgraded its economic assessment for all nine regions this week, and argues for a dose of caution as it meets next week. While no change in policy is expected, some reports suggest the bank will upgrade its assessment of inflation risks somewhat. If any whiff of optimism is detected, the yen may continue to strengthen and we think that’s something policymakers want to avoid. USD/JPY is testing a daily trendline drawn off the September lows. It comes in near 114.35 today and a break below would suggest greater losses ahead. The initial target would be the December 17 low near 113.15, followed by the November 30 low near 112.55.

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