Fed on the Defensive: Is Political Pressure Cracking the Dollar?.
Ceasefire between Iran and Israel has defused geopolitical tensions, triggering a sharp oil price drop (>15%) and weakening USD demand.
Fed officials’ dovish tones, including Trump appointees Waller and Bowman, suggest rising rate cut risks as early as July.
Market concern over Fed independence is growing, with Powell’s congressional testimony seen as a critical moment.
Euro and pound gains are more a product of dollar weakness than strong domestic fundamentals.
Dollar Index (DXY) has dropped significantly, and traders are re-entering strategic short positions as risk sentiment improves.
USD: Fed’s Independence Under Fire as Dollar Softens
Markets are quickly brushing off geopolitical tensions after President Trump confirmed a ceasefire between Iran and Israel, following yesterday’s restrained retaliation in Qatar. Israel backed the truce this morning, triggering another oil price decline—now over 15% down from Monday’s open.
The modest dollar strength built during recent uncertainty has faded. That’s not just due to falling oil prices—it’s also being undermined by a growing dovish tilt within the Fed. Recent comments from Fed Governors Waller and Bowman, both appointed by Trump, suggested openness to rate cuts as soon as July. Chicago Fed President Goolsbee echoed dovish sentiment yesterday, albeit without specific timing.
Attention now turns to Fed Chair Jay Powell’s congressional testimony today. He’s expected to face scrutiny over the Fed’s cautious stance, with markets bracing for any dovish nuances. If Powell hints at a shift, investors may interpret it as a crack in the Fed’s independence under Trump’s influence—an outcome that could sharply weaken the dollar. The market is now fully pricing in a September rate cut, with 23% odds for July.
Even without surprises from Powell, the dollar may test recent lows (DXY 97.62) as geopolitical fears fade and traders re-engage in short-dollar strategies. While a rebound in consumer confidence data might offer some support, it’s unlikely to reverse broader dollar selling pressure.
EUR: Dollar Weakness, Not Euro Strength, Drives Gains
Eurozone PMIs met expectations yesterday, suggesting business sentiment has stabilised—albeit near stagnation. Today’s German IFO release will add further insight into June’s economic activity.
While stronger domestic data could help, the euro’s rally isn’t built on fundamentals. Instead, it’s gaining as investors sell the dollar and look for substitutes. Oil’s sharp drop has also eased concerns about European vulnerabilities tied to energy.
EUR/USD is testing 1.1630 intraday highs. Further direction hinges on Powell’s testimony—any dovish tilt could trigger a meaningful breakout. Still, without that, we’re sceptical of a sustained move above 1.1600, given Treasury market calm and valuation headwinds.
Markets are also watching the NATO summit in the Netherlands, where leaders aim to solidify a 5% defence spending target.
GBP: Ceasefire Spurs Sterling Rally
The British pound extended Monday’s rally, climbing toward 1.3600 against the dollar in Tuesday’s European session. This rebound has been powered by easing geopolitical risk and a broader risk-on sentiment, pushing investors away from safe-haven currencies like the USD.
The dollar index (DXY) has dropped sharply to around 98.13, down from Monday’s peak near 99.40, as ceasefire news spread. Iranian media confirmed a truce, citing an end to four waves of Iranian attacks. Trump later confirmed on Truth.Social that both sides agreed to a “Complete and Total CEASEFIRE.”
The drop in oil—down nearly 15%—has been particularly helpful for oil-importing economies like the UK, adding further support to GBP/USD.