The dollar closed yesterday’s FOMC day lower, as it had done for the three prior FOMC meetings. We and the market were a little surprised that there was no further assessment of the strong US activity data or particularly the high inflation data and instead, Fed Chair Jerome Powell merely reiterated the recent line that it would take longer for the Fed to gain confidence to cut rates. As we discuss in our Fed review piece, the dollar seemed to react the most to comments from Powell that a rate hike was unlikely and that yesterday’s JOLT’s job opening data showed restrictive policy was working. The 10bp drop in rates at the short end of the US curve was enough to see DXY sell-off 0.5%.
When trying to recover yesterday, the DXY received another hit when Japanese authorities were thought to have intervened again late in the US afternoon – a time of thin liquidity and perhaps a reminder that intervention will still very much be an option during Japan’s four-day public holiday starting tomorrow. Given that the Bank of Japan is thought to be selling large clips of dollars – perhaps as much as $20-35bn per intervention session – the market is already starting to consider the size of available FX reserves for this purpose. We think Japanese authorities will intervene sparingly but are probably hoping they can stabilize USD/JPY ahead of a broad turn lower in the dollar, just as they did in September/October 2022.
The US data calendar is quite light today and the market will take its cues from tomorrow’s payrolls. There is a school of thought building that if the unemployment rate finally responds to slowing labor demand and pushes up to say 4.2% (currently 3.8%) by September, the Fed can cut rates. Let’s see what tomorrow’s jobs data has to say.
For today, DXY should trade well within the confines of its new 105.50-106.50 range.
Chris Turner
