Last Friday, we published a note looking at the market implications of a potential early departure of Fed Chair Powell. We deemed that an unlikely scenario, but for an hour yesterday afternoon it appeared very real. It was initially reported that a letter had been prepared by Trump and presented to GOP policymakers, and at one point the White House confirmed Trump was about to fire Powell. Shortly after, Trump said it was “unlikely” he would fire Powell.
In that hour, we saw the reaction we would have expected: a steepening in the US yield curve, and the dollar sharply lower. However, it never looked like markets fully priced in Powell’s exit yesterday afternoon. Pricing for a September Fed cut didn’t go beyond 20bp, and EUR/USD failed to get beyond 1.1720 even before Trump’s denial caused an unwinding of all market moves. It’s a clear symptom of the resistance developed by markets for the rollercoaster of headlines that have characterised Trump’s term so far. After yesterday’s scare, the bar will be even higher to take Fed independence threats seriously.
On the macro side, PPI figures came in below expectations yesterday, but this failed to wash away Tuesday’s CPI reality check, which is keeping markets from pricing in more than 15bp for the Fed’s September meeting. Today’s US calendar highlights are retail sales data for June and TIC data for May. We’ll look closely at the latter to see if there is any hard evidence of a substantial rotation away from US Treasuries, which can feed into the longer-term bearish USD argument. But for the near term, we still like the chances of dollar consolidation or slight re-appreciation.
Francesco Pesole
