USD: Powell’s bullet dodged, at least partly – ING

Geopolitical risk has continued to diminish for markets, as the Israeli-Iranian truce has held since yesterday morning. Markets will be assessing the stability of the ceasefire in the coming days, but are clearly biased towards playing the optimistic trade, judging by how quickly the oil premium has evaporated, ING's FX analyst Francesco Pesole notes.

Risks remain tilted to the downside for the USD

"We believe that the negative impact of the reduced geopolitical risk on the dollar has largely played out. From here, further USD losses may need to be justified by US-specific factors: data, Fed, Trump's spending bill and tariffs. Yesterday, the first of these two factors was in focus, and while a surprise drop in consumer confidence is unequivocally negative for the dollar, Fed Chair Powell's testimony was a more nuanced event."

"Powell reiterated caution on easing, and implicitly kept rejecting Trump's pressure, but also seemed modestly more open to discussing the conditions for starting cuts. Markets were actively searching for any minor signs of a dovish tilt after Waller and Bowman's calls for a July cut, and felt Powell's wording was enough, judging by the positive reaction in Treasuries. There is a sharply USD-negative scenario where the Fed turns more abruptly dovish and markets doubt Fed independence. But in that scenario, Treasuries would come under pressure."

"Instead, if Powell's communication allows only a moderate dovish repricing without signalling that he is bending to political pressure, the damage to the dollar can be limited. There is also a possibility that a slightly more dovish but firmly independent Fed ends up helping the dollar by helping Treasuries. Short-term rate spreads tell a small portion of the story in FX, while longer-dated yields are scrutinised much closer. We’ll see the second part of Powell’s testimony today, while the data calendar only includes housing data for May. We could see some stabilisation in the dollar, but risks remain tilted to the downside."