USD: Trading US deficit fears – ING

Yesterday, we suggested that the G7 finance ministers’ meeting in Canada could produce USD-supportive headlines, particularly if there were signs of easing trade tensions. So far, the summit has been quiet, but with meetings concluding today, we could still see market-moving headlines, ING's FX analyst Francesco Pesole notes.

Markets may favour selling into DXY strength above 100.0

"Instead, market attention has largely shifted to developments surrounding the US tax bill. House leaders are pushing for a vote before the Memorial Day recess and have introduced a revised version that raises the threshold for tax deductions– an expansionary measure aimed to win over moderate Republicans – as well as faster Medicaid cuts backed by more conservative party members. Market concerns over the deficit impact of the bill have intensified this week, and triggered another coordinated selloff in US equities and bonds yesterday. The dollar is falling across the board as a consequence. A softish 20-year auction yesterday added further pressure on Treasuries, with the widening 10Y UST-SOFR spread to -58 indicating fresh market stress."

"US equity futures and Treasuries are stabilising this morning, but the risks of another rough session for US markets remain tangible. Any relief from deficit-related concerns could be further reinforced by positive headlines on trade emerging from the G7 finance meetings in Canada. The post-'Liberation Day' episode underscored how quickly the dollar can fall amid renewed confidence issues surrounding US assets, and downside risks for the greenback remain elevated. At the same time, it highlighted that pressure in Treasuries—more so than in equities—has the potential to prompt policy reassessment in Washington."

"Early signs of a somewhat steadier market after the latest US tax bill developments suggest we could see the dollar find some tentative support or even rebound today. Still, markets may well favour selling into DXY strength above the 100.0 level."