USD drop extends on Fed focus, weak technicals - Scotiabank

The US Dollar (USD) is weaker this morning, falling for a fourth day in a row and extending below the recent lows for the DXY in the upper 97 zone to reach its lowest since early 2022. USD sentiment is weak and the dollar is at clear risk of weakening further, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

WSJ suggests Trump may name early Powell replacement

"June looks set to be another down month for the DXY, which would be it's sixth net monthly loss on the trot and its worst run since a similar fall in 2017. Intraday USD selling pressure appears to have been most intense through joint European/North American session hours over this week so far--it's where liquidity is the deepest for market participants can execute large flow if needed. Consistent selling pressure might indicate a large flow out of the USD or USD-denominated assets is being worked. Intraday weakness today is, however, associated with a WSJ report suggesting that President Trump may nominate Fed Chair Powell's replacement well before the chair's term ends in May next year."

The idea of a 'shadow Fed Chairman', someone who would presumably talk more dovishly about rate prospects, is nothing new and various names have already been suggested as potential replacements for Powell (current Treasury Sec. Bessent, for example). Bnut the idea may be more serious for the president now. US Treasury yields are lower and out-performing other markets this morning. Swaps are also pricing in a little more Fed easing risk this year now, to further weigh on USD sentiment. Dec swaps imply 63bps of Fed cuts, up from around 51bps a week ago. Given the weaker than expected run of US data reports of late, more softness in the economic reports due today and tomorrow may add to pressure on rates and the USD."

"Yesterday's 5-year Treasury auction was a little soft around the edges (0.5bps tail) but the results had little or no impact on stocks or the USD. The Treasury auctions USD44bn of 7Y bonds today (results at 13ET). The Banxico policy decision (15ET) is expected to result in a 50bps cut (the last in the cycle, Scotia thinks) to leave the Overnight rate at 8.00%. Japan releases Retail Sales, employment data and the June Tokyo CPI update this evening. Dollar losses are putting the DXY on a technical precipice. The index is trading below major retracement support in the upper 97s now and threatening long-term bull channel support at 96.5. Technical risks suggest the index may drop another 5-10% in the coming months."