The dollar weakens slightly in a trade in consolidation — BBH

The economists at Brown Brothers Harriman & Co. (BBH) suggest that the recent dovish turn by the Federal Reserve could continue to weigh on the US dollar, although the fundamental background favors the bulls.

Notable Statements:

“The DXY is trading near 105.15, but has held most of yesterday’s gains. While we continue to believe the fundamental picture favors the dollar, we recognize that near-term dollar weakness is likely to continue after the unexpected dovish turn in Powell: If US data remains dovish, like the ISM services dovish, that dovish Fed narrative could start to crack.

“After Powell’s speech last week, the narrative turned dovish. After AHE and services PMIs, that narrative is turning to the aggressive side again. We imagine there will be some whispers about 75bp from the Fed next week, but we believe that it will depend in large part on the CPI data that comes out the day before the decision.”

“That being said, we believe it was a mistake on Powell’s part to remove 75bp from the table last week. WIRP still suggests that a 50bp hike on Dec 14 is fully priced in, with only a 5% chance of success. a move higher than 75bp.The swaps market is pricing in a top policy rate of 5.0%, but the odds of a higher peak of 5.25% have moderated again.”

“Both AHE and core CPI have been stable near 5% for most of this year, despite falling CPI and PPI. We believe bringing core CPI back to the Fed’s target of 2% will be much more difficult than what the markets are pricing in. We don’t think two more 50bp hikes will do it, not when the labor market is still so firm and consumption is holding up.”