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Market Briefing: Dollar Flatlines Into Fed Meeting

CalendarFebruary 1, 2023

The greenback is effectively unchanged ahead of this afternoon’s Federal Reserve decision, suggesting that market participants are betting against any evidence of a “pivot” in policy. Yields are lower and risk appetite—as broadly proxied using weakness in the major equity futures benchmarks—is softer. Oil prices are up going into a meeting in which OPEC+ members are expected to support output near current levels.

Markets are overwhelmingly positioned for a quarter-point rate hike, and investors also expect Jerome Powell to deliver a stridently-hawkish message as he tries to reverse a potentially-dangerous easing in financial conditions. The Fed chair could suggest that the rates are still on course to rise toward 5.25 percent—implying two more quarter-point moves in months ahead—while emphasizing a commitment to keeping rates in restrictive territory for a prolonged period of time.

But with incoming data pointing to a relatively rapid moderation in growth and inflation pressures, markets don’t think the central bank will ultimately walk the walk. Since the last meeting, final demand has lost momentum, and all of the major inflation measures—consumer prices, consumption expenditures, producer inputs, and employment costs—have shown signs of rolling over. Overnight index swaps currently show the federal funds rate peaking at 4.9 percent within months, with two rate cuts coming in the autumn. This is even as the Fed’s own forecasts show the benchmark holding near 5.1 percent through year end.

Headline inflation in the euro area fell for a third month in January, but core inflation remained stable at uncomfortably high levels - keeping the European Central Bank on course toward a rate hike at tomorrow’s meeting. According to Eurostat, consumer prices climbed 8.5 percent in January from a year earlier, down from 9.2 percent in December as natural gas benchmarks slumped. With highly-volatile energy and food categories excluded, prices were up 5.2 percent year-over-year, unchanged from the prior month.

The euro is up 1.75 percent this year as falling energy prices, a more supportive export outlook, and a hawkish policy backdrop combine to support net capital flows. Investors expect the European Central Bank’s interest rates to hit 3 percent in March.

December’s job openings and labour turnover survey is expected to show the number of available positions falling to 10.3 million from 10.5 in the prior month, suggesting that hiring activity is slowing even as the labour market remains historically tight. Most economists expect to see a softening in other measures, including non-farm payrolls reports, over the coming months.

The Institute for Supply Management’s manufacturing index is seen dropping to 48.1  in January from 48.4 in December as the global factory sector enters a downturn.  Consumers in the major developed economies are cutting tangible goods purchases as savings cushions are unwound and other spending categories recover. Although this is a worrisome development on some level, manufacturing activities make up a relatively small share of gross domestic product in most countries, with services sectors playing a more important role in driving economic outcomes.




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USD    ADP Employment Change, January

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USD    Department of Energy Weekly Inventories

USD    Federal Reserve Rate Decision

BRL     Central Bank of Brazil Rate Decision


GBP     Bank of England Rate Decision

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USD    Durable Goods Orders, December, Final


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Karl Schamotta

Karl Schamotta

Chief Market Strategist

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