The dollar has stabilized ahead of the FOMC decision. DXY is trading higher near 99.45 after three straight down days. Risk sentiment continues to improve modestly, as PBOC easing outweighs heightened India-Pakistan tensions. USD/JPY is trading higher near 143.25. Elsewhere, the euro is trading lower near $1.1365 and sterling is trading lower near $1.3350. We continue to view any dollar relief rallies with skepticism, with recent gains unlikely to be sustained no matter how the U.S. data come in. Indeed, recent firm data have pushed out Fed easing expectations and yet the dollar remains soft. Today’s FOMC decision is unlikely to throw the greenback a lifeline (see below).
AMERICAS
The two-day FOMC meeting ends this afternoon with an expected hold. The Fed is expected to vote unanimously to keep the target range for the Fed Funds rate unchanged at 4.25-4.50%. We do not expect much in the way of tweaks to its March policy statement, when it warned that “uncertainty around the economic outlook has increased.” While the Fed should not give any hints about easing, the risk is always present that Chair Powell tilts dovish in his press conference, as recent survey data point to a worsening U.S. growth outlook. On the other hand, the April jobs report and other hard data support the view that the Fed can afford to remain patient. As such, we expect Powell to maintain his March view that “We do not need to be in a hurry, and are well positioned to wait for greater clarity.”
The next Summary of Economic Projections are due at the June 17-18 meeting. Recall that the March Dot Plots suggest two cuts in 2025, two in 2026, and one in 2027. In contrast, Fed Funds futures are pricing in three cuts in 2025 and two in 2026. Odds of a June cut are around 33% and fully priced in for July. With the 90-day pause in reciprocal tariffs set to end in early July, even that month seems too soon for a cut given the ongoing uncertainty regarding the impact of the tariffs. We see asymmetric risks today; any hints of dovishness are likely to weaken the dollar while any signs of hawkishness are unlikely to give the dollar much of a boost.
The Q2 growth outlook looks solid. The Atlanta Fed GDPNow model has Q2 growth at 2.2% SAAR vs. 1.1% previously and is nearly back at the initial estimate of 2.4%. It will next be updated Thursday after the data. Elsewhere, the New York Fed Nowcast model has Q2 at 2.3% SAAR and will be updated Friday, while its initial Q3 estimate will come at the end of May. For those keeping score at home, the gold-adjusted Atlanta Fed GDP model’s Q1 estimate of -1.5% SAAR was the closest to the actual initial Q1 reading of -0.3%, and that gold-adjusted model is now the standard one.
Brazil central bank is expected to hike rates 50 bp to 14.75%. At the last meeting March 19, the bank hiked rates 100 bp to 14.25% and said that “In light of the continuation of the adverse scenario for inflation convergence, the heightened uncertainty and the lags inherent to the ongoing monetary tightening cycle, the Committee anticipates an adjustment of lower magnitude in the next meeting, if the scenario evolves as expected.” The swaps market is pricing in 75 bp of total tightening over the next three months that would see the policy rate peak near 15.0%. Brazil reports April IPCA inflation data Friday. Headline is expected at 5.52% y/y vs. 5.48% in March. If so, it would be the highest since February 2023 and would move further above the 1.5-4.5% target range.
EUROPE/MIDDLE EAST/AFRICA
Sweden April CPI data ran cool. Headline came in two ticks lower than expected at 0.3% y/y vs. 0.5% in March, CPIF came in a tick lower than expected at 2.3% y/y and was steady from March, and CPIF ex-energy came in a tick lower than expected at 3.1% y/y vs. 3.0% in March. Still, CPIF inflation is stabilizing above the Riksbank’s 2% target, suggesting the bar for additional rate cuts is high. The Riksbank is widely expected to keep the policy rate steady at 2.25% tomorrow. The next Monetary Policy Report will be published in June. At its last March 20 meeting, the Riksbank kept the policy rate steady at 2.25% and signaled it was done easing. However, the swaps market disagrees and is pricing in 25-50 bp of further easing over the next 12 months.
National Bank of Poland is expected to cut rates 50 bp to 5.25%. Minutes from the April 2 meeting will be released Friday. At that meeting, the bank kept rates steady at 5.75% but unexpectedly signaled a switch to a dovish stance. Governor Glapinski said lower-than-expected inflation in the first quarter triggered a “radical shift” in policymakers’ outlook, adding that the scale of monetary easing in 2025 may exceed 100 bp if the government prevents energy prices from rising. Since then, inflation eased further in April with headline at a 10-month low of 4.2% y/y vs. 4.9% in March and tracking well below the NBP’s 2025 projection of 4.9%. Looking ahead, the swaps market is pricing in 150 bp of total easing over the next 12 months, followed by another 50 bp over the subsequent 12 months that would see the policy rate bottom near 3.75%.
Czech National Bank is expected to cut rates 25 bp to 3.5%. However, 5 of the 25 analysts surveyed by Bloomberg expect no policy change. At the last meeting March 26, the central bank kept rates steady at 3.75% and cautioned that “inflationary risks persist, requiring continued slightly restrictive monetary policy.” However, Governor Michl said “We can’t rule anything out. We are keeping all options on the table, including a further reduction in rates, as well as a rate hike.” Yesterday, April CPI came in at 1.8% y/y vs. 2.1% expected and 2.7% in March. This was the lowest since March 2018 and cements a cut today. Looking ahead, the swaps market is pricing in 100 bp of total easing over the next 12 months.
ASIA
New Zealand reported mixed Q1 employment data. The unemployment rate remained steady at 5.1% vs. 5.3% expected. However, other data point to weaker demand for labor. The underutilization rate rose 0.1 ppt to 12.3% (the highest since Q3 2020) and the participation rate fell 0.1 ppt to 70.8% (the lowest since Q2 2021). Moreover, wage growth cooled more than expected. Private wages increased 0.4% q/q vs. 0.5% expected and 0.6% in Q4, while the y/y rate slowed to 2.6% vs 3.0% in Q4 and was the lowest since Q3 2021. The swaps market is pricing in 75 bp of easing over the next six months that would see the policy rate bottom around 2.75%. The risk is the RBNZ cuts rates further towards the lower end of its 2-4% neutral range estimate.
People’s Bank of China eased policy. Most importantly, it cut the 7-day reverse repo rate 10 bp to 1.40% and cut reserve requirements 50 bp to 9.0%. There were also increased loan quotas as well as cuts to other sector-specific loan rates. The rather modest measures were widely expected as recent data have softened. April CPI and PPI data out this Saturday are expected to show deflation risks remain alive and well. As such, the stimulus measures announced today are by no means the last.
India-Pakistan tensions continue to ratchet up. India conducted targeted military strikes against “known terror camps” in Pakistan. Pakistan Prime Minister Sharif called India’s strikes an “act of war” and said his country had “every right to respond forcefully.” India’s military response against Pakistan had been brewing since the deadly shootings in Indian-administered Kashmir April 22. This long-simmering conflict erupts into hostilities from time to time and markets typically move on. However, further tit-for-tat conflict always has risks of escalation, which would be especially dangerous given that both countries possess nuclear weapons.
The U.S. and China will hold high-level trade talks this weekend in Geneva. Treasury Secretary Bessent tried to manage expectations by noting that “My sense is that this will be about de-escalation, not about the big trade deal.” Complicating matters, China slapped tariffs on insecticide imports from India to underscore its pledge to retaliate against any country that cuts a deal with the U.S. at China’s expense. Social media affiliated with China’s state media warned that “This retaliation against India is to tell India to stop insisting on its wrongdoing. And for those countries that are still waiting to see what happens and have similar thoughts, this is also a clear signal: if you want to use China’s interests as a bargaining chip to make exchanges, we will never agree to it, and we will certainly take countermeasures.”
