USD rebounds but Fed leadership remains in focus - Scotiabank

The US Dollar (USD) and Treasurys have settled down after yesterday's abrupt swings, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret note.

USD shakes off tumble on yesterday's Fed news

"President Trump apparently waved a draft letter firing Fed chair Powell in front of GOP lawmakers yesterday morning (and the White House briefed that the president would likely fire the Fed chair 'soon') only to later deny he was looking to terminate Powell after all. Perhaps the slump in the USD, Treasuries and US equities prompted a change of mind. That might not be the end of the matter. It would not be easy to fire Powell--a legal wrangle would certainly ensue--and securing congressional support for his successor's nomination might not be straightforward."

"There are also eleven other voting members on the FOMC that set policy along with the chair. Regardless, Powell's term is up in May and one way or another, the risk of a pretty heavy, political thumb on the scales of US monetary policy sooner or later is something that markets will have to factor in and perhaps are already doing, given the continued widening in US inflation swaps and the steeper US yield curve.

"This represents another possible headwind for the USD in the coming months beyond already established trade and fiscal policy negatives. While the USD is broadly higher so far today, with the EUR slipping back and the AUD underperforming after weak employment data lifted chances of an RBA cut next month, US Retail Sales may look a little soft (on a drop in auto sales) and Wednesday's market swings could help check the USD's advance for now."