Analysts at Nomura explained that renewed uncertainty about US politics is weakening risk sentiment.
Key Quotes:
"In the FX market, JPY has outperformed today, showing a typical reaction to the higher uncertainty. Impeachment of President Trump is unlikely, and this may not be a game-changer for the FX market. Various risk proxies, implied volatility in FX, rates and equity markets are still at relatively healthy levels, as European political uncertainty has subsided.
Nonetheless, increasing doubts over President Trump’s ability to proceed with his economic policies will likely hurt USD momentum for the time being, even though expectations for bold US economic policy had already declined before this. US hard economic data have not yet accelerated clearly, while soft data have slowed slightly. Economic momentum has been turning more positive for EUR/USD, and political risks will be an additional positive factor for EUR against USD.
We thus remain comfortable with our long EUR/USD positions. US market implications As with the FX markets, especially how the dollar has traded lately, bond markets have been equally sceptical of President Trump's economy policies being fully put in place anytime soon. Therefore, any sort of delay or new distractions in DC (which may result because of the latest news) will likely further push back fiscal stimulus prospects and that means less support for the economy, and all else being equal potentially for equity markets. This should lead investors to gravitate even more into yield trades such as in IG credit and long UST duration.
For the Fed, we do not think this will derail a June rate hike in view of the latest job numbers. Although the Fed has not fully embedded fiscal policy into its thinking, we will be keenly watching for any updates from Fed speakers if they are dialling back fiscal stimulus drivers and what that may mean for the pace of hiking and timing of a Fed balance-sheet unwind. Markets have been taking one hike at a time anyhow and with the latest inflation disappointment markets are already questioning how will the Fed see through this deceleration. In the end, a slowdown in the inflation trajectory matters more for the Fed's future hikes (after the hike in June) and we continue to like fading TIPs breakevens."
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