Powell Pulls the Plug: Markets Reeling as Fed Refuses Rescue.
Powell Stays Hawkish: The Fed Chair dashed hopes for near-term cuts, focusing solely on taming inflation, not rescuing markets.
USD Reaction Muted: Despite the hawkish tone, growth pessimism and weak asset performance kept the dollar under pressure.
ECB Cut Priced In: Markets expect a 25bp cut from the ECB with little forward guidance, leaving EUR/USD well-supported.
GBP Hit by Inflation & Geopolitics: Falling UK inflation and US threats of asset penalties dragged the pound lower.
Market Exodus from USD Assets: Proposals in Washington risk further capital flight from dollar-denominated assets amid growing global trade tensions.
USD: Fed Chair Sends Hawkish Shockwave
Fed Chair Jerome Powell brought the hammer down yesterday, delivering his firmest stance since the so-called “liberation day”—and it was unmistakably hawkish. Contrary to market hopes rooted in the Trump-backed narrative that the Fed would slash rates to counter inflation uncertainty, Powell signaled no such rescue. He flagged expectations for higher inflation and weaker jobs data due to tariffs, but emphasized that the Fed’s sole priority remains inflation.
Despite the hawkish tone, the dollar didn’t rally as it usually would. The broader market remains focused on underperformance in US assets and dim growth prospects—now worsened by the Fed’s posture. Interestingly, short-term USD swap rates barely budged, and markets still price in over a 60% chance of a rate cut in June, highlighting persistent pessimism about US growth and a belief that easing is inevitable.
Although technicals point to an oversold and undervalued dollar, there’s little reason to expect a rebound today. If US equities stumble again, DXY could fall further below 99.0. Jobless claims and housing data released today could further shape sentiment.
EUR: ECB Cut Expected, But Silence Likely
Markets are unanimous in expecting a 25bp rate cut from the ECB today—already fully priced in. As laid out in our ECB Cheat Sheet, don’t expect much forward guidance either. Policymakers, like markets, are still trying to make sense of how tariffs will impact the outlook. The ECB may mirror the Bank of Canada’s recent stance: honest uncertainty, no crystal ball.
Right now, FX markets aren’t placing much weight on short-term rate differentials. Otherwise, EUR/USD would be trading well below 1.10. There’s potential for some profit-taking on long EUR positions post-cut, but with the USD still struggling, the euro remains well-positioned to benefit.
We continue to aim for a short-term EUR/USD move to 1.15, possibly higher. By the end of the quarter, we see pressure on the USD easing somewhat and target 1.14 before a possible dollar rebound in Q3.
GBP: Pound Sinks Amid Dollar Exodus and Inflation Dip
Sterling lost ground against the euro early Wednesday as the dollar faltered further—driven by renewed US-China trade tensions and a proposed tax targeting foreign holders of American assets.
Adding pressure was a 20bp drop in UK headline inflation (to 2.6%) and a more impactful 30bp fall in services inflation (to 4.7%), the latter closely watched by the Bank of England.
The real market mover, though, was geopolitical. Trump signaled a hard stance, suggesting countries may have to choose between trade with the US or China. Coupled with proposed US legislation to penalize foreign holders of American financial assets—especially from countries with digital services taxes like those in the EU, Canada, UK, and Switzerland—the moves threaten to fracture global markets.
These proposals risk triggering another wave of outflows from dollar assets, echoing last week’s sell-off. The dollar weakened across all G20 currencies overnight—except for the Chinese Renminbi and Indonesian Rupiah—even as global equities broadly slid.