Dollar Soft as Markets Await Fresh Drivers

August 09, 2022
  • The lack of follow-through for the dollar is disappointing; the next big Fed event will be its Jackson Hole Economic Symposium; Fed tightening expectations still need to adjust; Mexico reports July CPI; Brazil central bank minutes will be released
  • BOE Deputy Governor Ramsden said interest rates will have to rise further to help limit inflation; Hungary reported July CPI
  • Japan reported July machine tool orders

The dollar is softer as markets await fresh drivers. DXY is down for the second straight day and is trading near 106 currently. The euro is back above $1.02 but remains heavy. Similarly, sterling is back above $1.21 but has seen little follow-through buying. USD/JPY traded at a new high for this move near 135.60 yesterday but has fallen back below 135. We maintain our strong dollar call but profess disappointment that it has not been able to move higher this week (see below).


The lack of follow-through for the dollar is disappointing. Last week was an eventful one, one filled with hawkish Fed comments that were backed up by strong U.S. data. Yet the dollar’s bounce has already run out of steam. For now, we are maintaining our strong dollar call and are chalking up recent price action to the start of the summer doldrums. Tomorrow’s CPI data could shake things up, but we don’t see much risk of the readings impacting Fed policy.

Ahead of the September 20-21 FOMC meeting, the next big Fed event will be its Jackson Hole Economic Symposium. It is scheduled for August 25-27 and this year’s theme is "Reassessing Constraints on the Economy and Policy." Fed Chairs often use this symposium in August to announce or hint at policy shifts ahead of the September FOMC meetings. By late August, we will have seen all the major July data and some of the early August surveys such as the preliminary S&P Global PMI readings and regional Fed surveys. The Fed will also have a good idea of how the economy is doing in Q3. That said, we do not think the Fed will make any major policy announcements or paint itself into a corner ahead of next month’s FOMC meeting. Rather, we expect the Fed to continue managing market expectations at Jackson Hole.

Fed tightening expectations still need to adjust. WIRP now showing over 75% odds of a 75 bp hike at the September 20-21 FOMC meeting. Looking ahead, the swaps market is now pricing in a 3.75% terminal rate vs. 3.5% at the start of last week. We think this is the correct read and if the market gives the Fed 75 bp next month, the Fed will take it. However, markets are still pricing in a quick turnaround by the Fed into an easing cycle in H1 2023. It's pretty clear that the Fed doesn't see it that way and the data bear that out, at least for now. Market should also reprice these easing expectations in the coming days and weeks. Q2 nonfarm productivity and unit labor costs will be reported today.

Mexico reports July CPI. Headline is expected at 8.14% y/y vs. 7.99% in June, while core is expected at 7.61% y/y vs. 7.49% in June. If so, headline would be the highest since December 2000 and further above the 2-4% target range. Banco de Mexico meets Thursday and is expected to hike rates 75 bp to 8.50%. At the last policy meeting June 23, the bank hiked rates 75 bp to 7.75%. The vote was unanimous and the bank said “For the next policy decisions, the Board intends to continue raising the reference rate and will evaluate taking the same forceful measures if conditions so require.” The swaps market is pricing in 175 bp of further tightening over the next 6 months that would see the policy rate peak near 9.50% but we see some upside risks.

Brazil central bank minutes will be released. COPOM just hike rates 50 bp to 13.75% last week and hinted at more tightening ahead as “The Committee will evaluate the need for a residual adjustment, of lower magnitude, in its next meeting. The COPOM emphasizes that it will remain vigilant and that future policy steps could be adjusted to ensure the convergence of inflation towards its targets.” July IPCA inflation will also be reported. Headline is expected at 10.10% y/y vs. 11.89% in June. If so, it would be the lowest since December but still well above the 2-5% target range. Next COPOM meeting is September 21 and one last 25 bp hike is priced in that would see the policy rate peak near 14.0%.


Bank of England Deputy Governor Ramsden said interest rates will have to rise further to help limit inflation. He noted that “For me personally, I do think it’s more likely than not that we will have to raise bank rate further. But I haven’t reached a firm decision on that. I’m to look at the indicators, look at the evidence as we approach each upcoming meeting.” He added that “So I wouldn’t want to make any predictions about where bank rate is going to end up. I guess one thing I would say is I think inflation expectations remain anchored, and that’s really important.” WIRP suggests a 25 bp hike September 15 is fully priced in, with 85% odds of a larger 50 bp move. The swaps market is pricing in 125 bp of tightening over the next 6 months that would see the policy rate peak near 3.0%, up from 2.75% at the start of last week.

Hungary reported July CPI. Headline came in at 13.7% y/y vs. 13.0% expected and 11.7% in June. It was the highest since July 1998 and further above the 2-4% target range. Central bank minutes will be released tomorrow. At the July 26 meeting, the bank hiked the base rate 100 bp to 10.75%, as expected, and promised to continue the tightening until CPI warrants an end. Next policy meeting is August 30 and another large hike is likely. The swaps market is now pricing in 75-100 bp of tightening over the next 6 months that would see the base rate peak between 11.5-11.75% but we see upside risks.


Japan reported July machine tool orders. Orders slowed to 5.5% vs. 17.1% in June. This was the slowest since October 2020, though high base effects played a role. Recent softness in the data should give the Bank of Japan even more confidence that it was correct to maintain its ultra-loose policy for the time being. Next policy meeting is September 21-22 and no change is expected then.

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