USD mixed to lower as focus remains on Fed - Scotiabank

It all looks fairly quiet on the FX front this morning as markets await tomorrow's comments from Fed Chair Powell. The US Dollar (USD) is narrowly mixed against the majors but minor losses versus the EUR and GBP leaves the Dollar Index (DXY) tracking a little lower on the session (and looking prone to more softness), Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

USD mixed versus majors

"Despite further gains in local bond yields (and more supportive spreads vs the USD), the JPY is modest underperformer on the session. US equity futures are a bit weaker and Treasurys are slightly softer as well. Moves are marginal but US stocks, bonds and the currency are lower all together this morning which is a little unusual. Yesterday's FOMC minutes for the July meeting reflected little change in the consensus that Fed policy remained 'well positioned' to deal with evolving risks but policymakers were still mainly concerned about inflation."

"This was all before the July jobs report, of course. The minutes suggest that Chair Powell's comments tomorrow may well reflect caution on inflation but leave the door open to lower rates if the labour market weakens further (given that risks have evolved somewhat). That will not satisfy bets on an aggressive easing move from the Fed ahead but might be just enough to sustain expectations of a modest cut in September. The USD might gain a bit if Powell does indeed maintain a cautious outlook. But if the Fed thinking on rates is not shifting materially, the near relentless political badgering of policymakers is likely to continue. It is hard to overlook this as a negative for the USD, or at least a constraint on its ability to strengthen."

"Now, President Trump would apparently like to say "you're fired" to Governor Cook, a centrist/dovish voice on the Board, amid accusations of mortgage fraud. If anything, these sorts of manouevers may make the Fed even less inclined to adjust policy in the short run. In the longer run, the perception of an erosion in the Fed's independence may result in investors demanding a higher risk premium for holding USD-denominated assets. There are a number of US data reports out this morning, including weekly claims, the Philly Fed survey, preliminary PMIs, the Leading Index and Existing Home Sales. Japan releases July CPI data this evening."