USD rebound stalls, inflation concerns persist - Scotiabank

After gaining steadily since the start of the month, the USD's rebound may be showing clearer signs of at least stalling this morning. The USD is trading mixed against the major currencies but is showing minor losses against the core majors and the DXY is holding within yesterday's range at this point. It's not definitive though and the persistence of the rebound since July 1 cannot be ignored, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

USD gains against the core majors stall

"Still, there are clouds on the USD's longer-term horizon, some familiar (fiscal and trade policy) and some still forming. The White House continued to attack Fed Chair Powell following the release of yesterday's US CPI data. On the one hand, the core data rose a slightly lower than expected 0.2% in the month. On the other hand there were some signs in the details (core goods) indicating that tariffs may be having some impact on prices. Something for everyone, in other words, depending on your chosen narrative. The president repeated his call that interest rates should be 3 points lower."

"The deputy WH chief of staff lampooned Chair Powell on X. Speaking before the data, Treasury Sec. Bessent remarked that the search for Powell's replacement was underway (recently he suggested the process might not start until late in the year). While it is highly unlikely that Fed Chair Powell will quit before his term ends, administration pressure on the Fed leadership is unlikely to relent. Speaking later, the president remarked that he thought the Fed/ renovations issue were 'sort of' a fireable offense'. The appearance of maneuvering that could potentially lead to the removal of the Fed chair should be of more concern to markets than it apparently is. Such an eventuality would likely be disruptive for financial markets and undermine confidence in the Fed.

"US inflation swaps continue to rise, which is perhaps a manifestation that investors are growing worried about the Fed's ability to curb inflation in the medium term amid focus on the Fed and with the trade deals the US is striking of late coming with higher than expected baseline tariffs. The 2Y inflation swap rose to 2.97%, its highest since 2023. US PPI is expected to rise 0.2% in headline and core terms in June. Both measures are expected to slow somewhat in Y/Y terms. The Fed's Beige Book release at 14ET is likely to underscore the cautious outlook for policy amid sticky prices and resilient activity."