FX Daily: USD down but not out after FOMC

DXY delivered a muted depreciation to 101.25 at the FOMC meeting. DXY initially fell to a weekly low of 101.07 after the expected 25 bps hike to 5-5.25% and a possible pause signal in the FOMC statement. However, DXY rebounded to 101.53 after Fed Chair Jerome Powell clarified that the Fed had “not made a firm decision on whether it will stop raising interest rates.” On Tuesday, the Reserve Bank of Australia had already demonstrated what a hawkish pause meant with its surprise hike on Tuesday after it kept rates unchanged in March. Malaysia also surprised with a hike yesterday after two pauses. Despite the final drag from disappointed investors pulling US stocks and US Treasury yields lower, DXY did not break this year’s trading range between 100.8 and 105.9. Today, markets are wary that EUR/USD may correct lower if it fails to push above 1.11 after the European Central Bank dials down to a 25 bps hike at today’s meeting. On Friday, St Louis Fed President James Bullard, a hawk who favours more hikes, will share his post-FOMC thoughts.

Powell highlighted that the Fed needed more data to be confident that the Fed Funds Rate was restrictive enough to bring inflation back to the 2% target because the tight labour market has not cooled sufficiently. The ADP Employment Survey added 296k jobs in April, more than the 150k consensus and the 142k in March. The ISM Services PMI employment index slowed to 50.8 from 51.3. Markets will not welcome any surprises in tomorrow’s US nonfarm payrolls significantly if they rise instead of falling to 182k consensus in April from 236k in March. Consensus expects the unemployment rate to rise to 3.6% from 3.5% but sees average hourly earnings unchanged at 0.3% MoM and 4.2% YoY. Next week, consensus expects US CPI inflation to bounce to 0.4% MoM in April from 0.1% in March.

Quote of the day
“Inflation has moderated somewhat since the middle of last year, nonetheless inflation pressures continue to run high and the process of getting inflation back down to 2% has a long way to go.”
Fed Chair Jerome Powell on 3 May 2023

4 May in history
In 1979, the Conservative Party took a half page advertisement in the London Evening News to congratulate Margaret Thatcher on becoming Britain’s first female prime minister. The advertisement read, “May the Fourth Be With You, Maggie. Congratulations!”

Philip Wee

Senior FX Strategist - G3 & Asia

philipwee@dbs.com

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