The dollar is soft on rising concerns about Fed independence. DXY is trading lower for the fifth straight day near 97.182 on reports that President Trump may name a shadow Fed Chair due to his displeasure with the hawkish Powell (see below). For DXY, the near-term target is the January 2022 low near 94.629 but the longer-term target is the January 2021 low near 89.209. The euro is trading higher near $1.1715 after earlier making a new cycle high near $1.1745. Near-term target for EUR is the September 2021 high near $1.1910 but the longer-term target is the January 2021 high near $1.2350. Similarly, sterling is trading higher near $1.740 after earlier making a new cycle high near $1.3765. Near-term target for GBP is the July 2021 high near $1.3985 but the longer-term target is the June 2021 high near $1.4250. The yen is outperforming, with USD/JPY trading lower near 144.20. Here, the near-term target is the mid-June low near 142.80 while the longer-term target is the April low near 139.90. While the dollar will see a modest haven bid from time to time given simmering Middle East tensions, we believe the fundamental dollar downtrend remains intact. With recent US data coming in soft, we expect markets to start pushing back harder against the Fed’s hawkish hold last week. Indeed, some Fed officials are pushing back against Powell already and others are likely to join them in the coming days and weeks. Market repricing of Fed easing along with fading risk off impulses should open up dollar downside again. A perceived loss of Fed independence would also feed into the ongoing loss of confidence in US policymaking.
AMERICAS
Reports emerged that President Trump will name his choice for Fed Chair sooner than expected. Previous reports suggested the search would begin this fall but now it seems the actual choice may be announced by September or October. Naming a “shadow” Fed Chair is USD-negative as it risks undermining the Fed’s credibility. Conflicting signals between the actual Chair and a perceived “shadow” Chair will increase market confusion, lead to mixed policy expectations, and erode the Fed’s image as a non-partisan institution. The dollar’s downtrend picked up after these reports.
The reports suggest the choice is down to three or four candidates. Former Fed Governor Kevin Warsh, current Governor Christopher Waller, current National Economic Council head Kevin Hassett, and former World Bank President David Malpass are said to be in the running. Treasury Secretary Scott Bessent has also emerged as a leading contender. Warsh is perceived as a policy hawk while the other contenders lean dovish. Hassett said yesterday that the Fed has plenty of room to lower interest rates right now. Waller stressed last week that the Fed can lower rates as early as July. Bessent has not commented on Fed policy but would certainly be eyed with suspicion by the markets as to where his allegiances lie.
That said, the Fed chair is not an autocrat. While the Chair is thought to wield outsized influence, U.S. monetary policy is set by the FOMC (7 governors and 5 rotating regional Federal Reserve Bank presidents), which constrains the power of any one individual in setting policy. Each member has one vote, and all decisions are made by majority vote. Moreover, the Fed chair is subject to Senate confirmation.
Powell said nothing really new in his testimony before the Senate Banking Committee. The market is pricing in around 25% odds of a July cut but this becomes fully priced in for September vs. 80% odds at the start of this week. Barkin, Hammack, and Barr speak today.
The Fed released plans to relax the so-called enhanced supplementary leverage ratio, or eSLR. This has been in effect since 2018 but was temporarily relaxed in 2020 during the pandemic with the aim of freeing up capital so that banks could issue new loans. Under the new plan, the eSLR would be nearly halved to 3%. Vice Chair for Supervision Bowman said “The proposal will help to build resilience in U.S. Treasury markets, reducing the likelihood of market dysfunction and the need for the Federal Reserve to intervene in a future stress event. We should be proactive in addressing the unintended consequences of bank regulation.” Her predecessor Barr was against lowering the eSLR because he believed it would raise financial stability risks. Of note, other changes can be proposed during the 60-day public comment period.
Chicago Fed May National Activity Index will be reported. Headline is expected at -0.13 vs. -0.25 in April. If so, the 3-month moving average would fall to -0.12 vs. 0.05 in April. This would be the lowest since November and would move closer to the -0.7 threshold that typically signals recession.
The growth outlook is starting to deteriorate. The New York Fed Nowcast model now estimates Q2 growth at 1.9% SAAR vs. 2.3% the previous week and Q3 at 2.1% SAAR vs. 2.5% the previous week. These latest readings aren't bad but are clearly decelerating after weeks of strength. Next update is tomorrow. Elsewhere, the Atlanta Fed GDPNow model now estimates Q2 growth at 3.4% SAAR vs. 3.5% previously and will also be updated tomorrow.
Weekly jobless claims should confirm that the labor market is starting to crack. Continuing claims are for the BLS survey week containing the 12th of the month and are expected to rise slightly to 1.950 mln. Elsewhere, initial claims are expected to fall slightly to 243k. If so, the 4-week moving average would rise to 247k, the highest since June 2023. Bloomberg consensus for June NFP is 116k vs. 139k in May, while its whisper number stands at 111k. We see risks of a sub-100k reading.
Banco de Mexico is expected to cut rates 50 bp to 8.00%. At the last meeting May 15, Banco de Mexico cut rates 50bps for the third straight meeting to 8.50% and added that “The Board estimates that looking ahead it could continue calibrating the monetary policy stance and consider adjusting it in similar magnitudes.” The decision was unanimous and so the bank seems determined to continue cutting rates despite upside risks to inflation. The swaps market is pricing in 100 bp of total easing over the next 12 months that would see the policy rate bottom near 7.50%.
EUROPE/MIDDLE EAST/AFRICA
German July GfK consumer confidence fell. Headline came in at -20.3 vs. -19.2 expected and a revised -20.0 (was -19.9) in June. This was the first drop since March. Most German sentiment measures rose in June and so the July GfK reading warns that the improvement may be plateauing. The swaps market is pricing in one more 25 bp cut from the ECB over the next 12 months.
U.K. CBI reported a weak June distributive trades survey. Total reported sales came in at -39 vs. -43 in May, while retailing reported sales came in at -46 vs. -25 expected and -27 in May. Looking ahead, expected retailing sales fell to -49 vs. -37 in June and was the weakest outlook since February 2024. May retail sales were much weaker than expected and this CBI survey points to weaker consumption ahead. June BRC sales will be reported July 14 and June retail sales will be reported July 25. Given growing weakness in the data, the BOE is on track to continue easing at the August 7 meeting, where there are currently around 85% odds of a 25 bp cut. Looking ahead, the swaps market is pricing in 75 bp of total easing over the next 12 months.
ASIA
Japan and the US are far from a trade deal. Japan’s chief trade negotiator Akazawa said “We have repeatedly explained to the US that Japan’s automobile industry has made an enormous contribution to the US economy, and we intend to keep explaining this clearly and seek understanding. In any case, we consider the 25% automobile tariff to be unacceptable.” There have been six rounds of bilateral talks over the past two months and the two sides remain far apart, it seems.
The Hong Kong Monetary Authority intervened to defend the weak end of the trading band. This was the first intervention to support HKD since May 2023, and comes just weeks after the HKMA defended the strong end of the trading band. The intervention drained excess HKD liquidity and led to a modest rise in Hong Kong interbank rates. Despite this rise in local rates, the wide gap with comparable US rates indicates that HKD liquidity remains abundant and further HKMA interventions are likely. Eventually, those rates will rise enough to move HKD off the weak end of the trading band, by making it costlier to short and also making it more attractive to hold. We see no threat to the 7.75-7.85 trading band, and simply note that heightened volatility is spreading to more and more assets and markets.
