The dollar enters FOMC day after having shown some resilience over the past few sessions. The last important piece of data before the Federal Reserve announcement – yesterday’s Employment Cost Index – offered more reasons to think the Fed is indeed close to the peak. Labor costs eased for a fourth consecutive quarter in 4Q, moving from 1.2% to 1.0%, the same levels as the fourth quarter of 2021. This is likely easing some concerns in Washington about inflation stickiness and underpins a scenario where slowing price pressures favor less hawkish rhetoric.
We expect a 25bp rate hike today which is the consensus view. We think that Fed Chair Jerome Powell and his colleagues simply have little interest in sending strong signals that they are indeed close to the peak, which only risks generating a premature fall in interest rates. A reiteration that ongoing rate increases remain appropriate, inflation is high and that the jobs market remains tight despite slowing growth, seems to us the most likely content of today’s communication by Powell.
We also have some US data to watch today: ISM manufacturing, ADP payrolls and JOLTS jobs openings. Substantial surprises on those releases are likely needed to drive major dollar moves ahead of such a big event like the FOMC.
The US dollar reversed dramatically lower against the Canadian dollar yesterday primarily driven by the recovery in US equities and oil. The greenback peaked above 1.3470 yesterday to set a seven-day high and then reversed dramatically to below 1.3300. The pair has slipped to about 1.3290 today, but the heavier tone to US equity futures is helping the greenback return above 1.3300. Today, Canada sees its January manufacturing PMI. Consistent with the broader slower down in the economy, the manufacturing PMI has not been above 50 since last July. The USD/CAD is likely to take direction from the FOMC today. Technically, resistance is seen around 1.3350, while a convincing break of 1.3300 targets the mid-November low near 1.3225.
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