🎙️ FX Talk | Get updated on what's happening on the financial markets in 20 min. listen here.

Dollar falls as Federal Reserve signal pause in hikes, inflation permitting

( 3 min read )

  • Go back to blog home
  • All posts
    All posts|Currency Updates
    All posts|Currency Updates|International Trade
    All posts|International Trade
    Central Bank Meetings
    Charities & NGOs
    Currency Updates
    Currency Updates|In The News
    In The News
    International Trade
    Product Update
    Security & Fraud
    Special FX Reports
    Special Report
    Weekly Market Update
  • Latest

9 May 2023

Written by
Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.

The Federal Reserve and the ECB both followed their script closely, hiking 25bp. The former suggested that it would like to pause at the June meeting but needs to see lower inflation. The latter is not yet done in this cycle. Both remain very data dependent and implied that any forward guidance is of limited use for now. The
dollar sold off on the news, modestly against European currencies, more sharply against those of commodity exporting prices. Recent ranges against the euro and the pound continue to hold, however.

ocus this week will be on the Bank of England monetary policy meeting on Thursday, when a 25bp hike is universally expected. Not much news of note out of the Eurozone, but in the US the April CPI report is released Wednesday, one of the two that remain to be published before the next Fed meeting in June. The debt ceiling impasse in Washington is also coming into focus as the deadline to reach an agreement is just weeks away, though for now the impact in the FX market remains minimal.

Figure 1: G10 FX Performance Tracker [base: USD] (1 week)

Source: Bloomberg Date: 09/05/2023


A quiet week with little data or news nevertheless saw Sterling continue to drift higher against both the euro and the dollar. All eyes now turn to the Bank of England May meeting on Thursday. A 25bp hike to 4.5% is more or less a given, but the key will be the tone in MPC communications, its macroeconomic projections, and the actual vote split. Activity and inflation data have both surprised on the upside in the past few weeks. We think this opens the door for a degree of hawkishness in both the forecasts and the statement, and see scope for pound gains later in the week.


The ECB meeting went almost exactly according to script. The rate was increased by 25 bp to 3.25%, and the statement refrained from providing any forward guidance, emphasising that decisions from now on will be data dependent. The key question is of course how many more hikes are on the way. Current market expectations of barely two more 25 bp moves strikes us as way too optimistic, given the stickiness of core inflation in the Eurozone, and we look for at least three more hikes and consequent common currency strength.


The Fed confirmed last week that it is looking to pause the most aggressive hiking campaign in many decades,but that it needs inflation data to cooperate. The US labour market remains stubbornly tight, as confirmed by the strength of the April payroll report released two days after the Fed meeting. As banking fears continue to recede, and indications mount that the credit contraction is less severe than feared, this week’s CPI report takes on added importance. A positive surprise may force markets to revise their views that we have seen the peak in short term rates.


Last week was marked by a few national holidays in Japan, yet this did not prevent the yen from appreciating considerably, by about 1%, against the dollar. Economic releases were scarce and concentrated at the very beginning of last week. The manufacturing PMI rose marginally in April (49.5) from a downwardly revised March print, while the upward trend in the household confidence index (35.4) continued.

A new week began with mixed signals. On the one hand, we found out that the PMI for services reached a record high in April (55.4), on the other hand, household spending fell significantly and unexpectedly (-1.9% year-over-year). Aside from the BoJ Summary of Opinions out on Thursday we’ll focus primarily on the outside news.


The yuan ended the labour day ‘golden week’ little changed against the US dollar, yet placing among the worst-performing Asian currencies. In fact, the trade-weighted CFETS RMB index fell to the lowest level this year last week. Underwhelming Caixin PMI data, which echoed the official PMIs released a few days earlier, did not help the currency. Both manufacturing PMIs landed below level 50 in April, which separates expansion from contraction in the sector. The services sector fared much better, but still not as well as expected.

Today’s trade data is adding to concerns about the state of recovery. The focus is on imports, which registered a contraction of 7.9% year-over-year in April, much sharper than expected. This signals some weakness of domestic demand and suggests that China’s economic recovery does not provide a lot of support to the country’s trading partners. Looking ahead, we’ll primarily focus on April inflation data out Thursday. Both PPI and CPI inflation readings are expected to show an extension of a recent downtrend.

To stay up to date with our publications, please choose one of the below:

📩 Click here to receive the latest market updates
👉 Our LinkedIn page for the latest news
✍️ Our Blog page for other FX market reports

🔊 Stay up to date with our podcast FXTalk