USD firmer but off highs amid soft risk sentiment - Scotiabank

The US Dollar (USD) has advanced in overnight trading, with markets trading with a distinct whiff of risk aversion amid reports that the US is planning for a possible strike on Iran in the coming days, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

USD broadly higher as risk appetite softens on geo-political focus

"European stocks and US equity futures are lower, following heavier losses for Asian markets. The CHF is outperforming, despite the SNB cutting its policy rate to zero. The NOK is underperforming following an unexpected 25bps cut from the Norges Bank (and hints that another cut may follow). Crude and gold are modestly firmer but Treasurys are flat (while European government bonds are softer). The FOMC left policy unchanged, as expected, at yesterday's meeting. The Fed's updated forecasts did not reflect any change in the median expectation for two rate cuts this year--but the spread of dots did shift to reflect more policymakers (seven) expecting no change versus the March meeting (four) and only additional one cut next year--mildly hawkish."

"Economic forecasts anticipated a bit more inflation and a bit less growth this year, reinforcing the stagflationary undertone to recent economic developments. The USD picked up a little in response, with Chair Powell suggesting that the economy was "not crying out" for a policy ease and noting that data and sentiment had improved in recent months. That's debatable. Recent US data reports have disappointed relative to expectations and the US Business Roundtable unveiled its Q2 survey yesterday, reflecting a further slide in CEOs' economic outlook (to the weakest since late 2020). The group noted that extending tax reforms is critical but not 'sufficient' and businesses need the administration to 'rapidly' secure trade deals to remove harmful tariffs and provide more certainty for investment."

"Progress on trade deals remains slow though--the president is distracted and forging agreements with key partners is proving difficult. The 90-day reciprocal tariff "pause" ends in less than three weeks. The Juneteenth holiday in the US will keep activity in our session on the light side but that may favour a little back and filling of the USD's broader push up in the past couple of sessions. Intraday chart patterns suggest a near-term (at least) top may be developing in the DXY. Losses may pick up below 98.70. There are no data reports from North America today. Japan releases May CPI data this evening."