Iran and Israel have agreed to a ceasefire, and markets had already started pricing out geopolitical risk yesterday as Iran’s retaliatory strikes against the US appeared measured in size.
The US dollar is facing fresh pressure on the back of plummeting oil prices, and downside risks for USD remain elevated ahead of Fed Chair Powell’s testimony later today
USD: Fed Independence Risks Can Take Over Now
Markets are materially scaling back geopolitical risk as President Trump declared that a ceasefire between Iran and Israel is in place following measured retaliatory strikes on US positions in Qatar yesterday. This morning, Israel confirmed it has agreed to a ceasefire, prompting another leg lower in oil prices, which are now more than 15% off Monday’s open.
The support that had built for the dollar – albeit moderate in size – over the past few days has faltered on the back of the oil correction, but we think a growing dovish front in the FOMC is also doing quite a lot of harm to the greenback. After Christopher Waller and Michelle Bowman – both Trump appointees – openly showed support for cutting rates even as early as July, Chicago Fed President Austan Goolsbee also sounded open to easing yesterday, even though he didn’t discuss timing.
Today, Chair Jay Powell faces Congress in a testimony where he will likely be intensively questioned on the Fed’s cautious approach to easing, echoing criticism from Trump. The risks of some dovish hints by Powell and, by extension, downside risks for the dollar have increased after the latest comments by Waller and Bowman, in our view.
Crucially, markets may treat any tweaks in Powell’s stance as an indication that Trump’s political pressure has breached the independence shield of the Fed – and that has the potential to drive substantial USD depreciation. The USD OIS curve is now fully pricing in a September cut, compared to less than 20bp at Monday’s open. A July cut is now 23% priced in.
Even without a dovish surprise from Powell, DXY may well retest the 97.62 lows in the coming days, as markets are much freer to jump back into popular strategic dollar shorts now that geopolitical and oil risks are being priced out. Some support may come from a potential return above 100 in the Conference Board Consumer Confidence, whose June print is published this afternoon, but that may not prove enough to take the dollar on a sustainable recovery.
EUR: Breaking the Range?
Eurozone PMIs came in largely in line with expectations yesterday, signalling that business sentiment has stabilised after the tariff scare but still points to stagnation. This morning, the German IFO will complete the picture for June’s activity surveys.
The euro would benefit from an improvement in domestic activity indicators, but those are neither particularly likely nor necessary to take EUR/USD higher from here. That’s because the euro continues to benefit from the buildup of dollar shorts and its substitution value rather than any strong eurozone narrative. Incidentally, the drop in oil prices means concerns about the erosion of EUR fundamentals are dissipating.
EUR/USD is re-testing the 1.1630 intraday highs this morning. Much of the direction today will depend on whether markets find any dovish hints in Powell’s testimony, which holds the keys for a decisive break higher. Barring that, we remain unconvinced that there is enough thrust to keep EUR/USD sustainably bid beyond the 1.1600 mark, considering the calm in the Treasury market and extensive overvaluation.
Markets will also keep a close eye on the NATO summit in the Netherlands, where NATO leadership is trying to build consensus on a 5% defence spending commitment.
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