USD: Powell rejects rescuer role - ING

Fed Chair Jerome Powell delivered the clearest message since 'liberation day' yesterday, which was unquestionably hawkish, ING's FX analyst Francesco Pesole notes.

DXY can extend its drop below 99.0

"Markets had leaned towards the Trump-backed narrative that the Fed would come to the rescue with rate cuts despite inflation uncertainty. Powell said he expects higher inflation and a weaker jobs market due to tariffs, but that the Fed is primarily focused on the inflation aspect. With Trump having shown greater tolerance to market turmoil than anticipated and Powell now refusing to throw a lifeline, equities remain vulnerable."

"In normal market conditions, Powell's hawkishness would have triggered a positive USD response. But the greenback is still responding to the narrative of relative US assets underperformance and growth concerns, which are arguably being compounded by a hawkish Fed. Interestingly, front-end USD swap rates didn't move higher on Powell's comments, and a cut in June is still more than 60% priced into the OIS curve. This is again a signal of firmly pessimistic growth expectations in the US, which are ultimately seen as leading to Fed easing."

"Despite plenty of indications that the dollar is oversold and undervalued, we don't see a catalyst for a respite today. Should US equities underperform again, DXY should extend its drop below 99.0. Markets will keep a close eye on any hints that jobless claims have risen in the week after "liberation day". Housing figures are also published today and expected to come in soft."