Dollar Remains Under Pressure as Fed Easing Bets Mount

September 16, 2024

Win Thin

Fed easing expectations continue to ramp up ahead of the FOMC decision Wednesday; we acknowledge significant risks of a dovish surprise; regional Fed surveys for September will start rolling out; BOC Governor Macklem ramped up the dovish guidance over the weekend
Eurozone reported softer Q2 labor costs; the tug of war between the ECB hawks and the doves continues; U.K. house prices continue to recover
The yen continues to gain ahead of the BOJ decision Friday; weak credit data prompted the PBOC to pledge more action

The dollar remains under pressure as Fed easing expectations intensify. DXY is trading lower for the third straight day near 100.682 as the market ramps up expectations for a jumbo 50 bp cut Wednesday (see below). The yen continues to gain even though BOJ expectations remain unchanged (see below), with USD/JPY trading at a new cycle low today near 139.60 before recovering to 140.15 currently. The euro is trading higher near $1.1125 despite softer Q2 labor costs (see below), while sterling is trading higher near $1.3200. We continue to believe that market expectations for aggressive Fed easing remain overdone (see below) and yet we cannot stand in the way of this fast-moving freight train. Until market pricing changes, the dollar will remain under pressure. While we acknowledge heightened risks of a dovish surprise from the Fed this week, it will likely push back against market pricing for 250 bp of easing over the next 12 months (see below). If so, the dollar should get some traction.

AMERICAS

Fed easing expectations continue to ramp up ahead of the FOMC decision Wednesday. We continue to believe the data warrant a 25 bp cut, as does the majority of analysts polled by Bloomberg. However, a handful of analysts look for a larger 50 bp cut, while the market is now pricing in nearly 65% odds of such a move, up from 10% after the PPI data. Furthermore, the market is pricing in 250 bp of total easing over the next 12 months, something we view as very unlikely. In fact, we do not expect the updated Dot Plots to validate such an aggressive rate path. For now, however, the market is running with this view and the dollar is clearly suffering as a result.

We acknowledge significant risks of a dovish surprise from the Fed. However, it’s clear not everyone at the Fed will be on board with such an aggressive move and so the vote for the monetary policy action will be worth monitoring. The last time there was an official dissent at the FOMC was at the June 2022 meeting. It’s worth noting that the Timiraos article suggested that Powell’s colleagues were surprised by his dovish tone at Jackson Hole.

Regional Fed surveys for September will start rolling out. Empire manufacturing survey kicks things off today and is expected at -4.0 vs. -4.7 in August. New York Fed services will be reported tomorrow and stood at 1.8 in August. Philly Fed manufacturing will be reported Thursday and is expected at -1.0 vs. -7.0 in August.

Bank of Canada Governor Macklem ramped up the dovish guidance over the weekend. He warned that “if growth does not materialize as expected…it could be appropriate to move faster [on] interest rates.” Slower August CPI inflation readings tomorrow may boost the case for a jumbo 50 bp cut at the next BOC meeting October 23. Currently, the market sees nearly 45% odds of such a cut.

EUROPE/MIDDLE EAST/AFRICA

Eurozone reported softer Q2 labor costs. Hourly total labor costs rose 4.7% y/y vs. a revised 5.0% (was 5.1%) in Q1 and is in line with ECB projections. The non-wage component rose 5.2% y/y vs. 4.6% in Q1, while the wage component eased to 4.5% y/y vs. 5.2% in Q1. Forward-looking wage growth trackers point to slower wage growth ahead and leaves plenty of room for the ECB to continue cutting rates.

The tug of war between the ECB hawks and the doves continues. After the less dovish than expected message, unnamed officials said an October cut had not been ruled out. Today, GC member Kazimir said “We will almost surely need to wait until December for a clearer picture before making our next move. I would require a significant shift, a powerful signal, concerning the outlook to consider backing another cut in October. But the fact is that very little new information is in the pipeline.” Over the weekend, Nagel and Wunsch sounded cautious too. Chief Economist Lane speaks later today. Odds of a cut in October stand near 30% vs. 50% last week.

U.K. house prices continue to recover. Rightmove national asking prices rose 0.8% m/m in September vs. -1.5% in August. In y/y terms, asking prices rose at a five-month high of 1.2% vs. 0.8% in August. The rise in net mortgage approvals in July, to the highest since September 2022, points to firmer house prices. Rates should continue to come down slowly, as the market sees only around 25% odds of a 25 bp cut by the BOE this Thursday.

ASIA

The yen continues to gain ahead of the Bank of Japan decision Friday. Expectations for a hike this week are nil as the market is pricing in the next hike well into 2025, with only 25 bp of tightening seen over the next 12 months. Instead, the move in USD/JPY below 140 today is all coming from the U.S. side, as the 2-year UST yield sinks and differentials fall to new cycle lows.

Weak credit data prompted the PBOC to pledge more action. After it reported soft August new loan data Friday, the bank issued a rare accompanying statement that “We will make maintaining price stability and pushing for the mild rebound in prices an important consideration for monetary policy and meet reasonable financing demand for consumption in a more targeted way,” adding that it was “preparing to launch some additional measures, further lower the financing costs for businesses and households, and keep liquidity reasonably ample.” Afterwards, China reported weak real sector data. Industrial production, fixed asset investment, and retail sales growth slowed more than expected in August. Moreover, the property slump worsened. New home prices fell -5.3% y/y in August, the most since 2015 and used home prices fell a record -8.2% y/y.

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