USD: Fed independence risks can take over now - ING

Markets are materially scaling back geopolitical risk as President Trump declared that a ceasefire between Iran and Israel is in place following measured retaliatory strikes on US positions in Qatar yesterday. This morning, Israel confirmed it has agreed to a ceasefire, prompting another leg lower in oil prices, which are now more than 15% off Monday's open, ING's FX analyst Francesco Pesole notes.

DXY may well retest the 97.62 lows in the coming days

"The support that had built for the US Dollar (USD) over the past few days has faltered on the back of the oil correction, but we think a growing dovish front in the FOMC is also doing quite a lot of harm to the greenback. After Christopher Waller and Michelle Bowman - both Trump appointees - openly showed support for cutting rates even as early as July, Chicago Fed President Austan Goolsbee also sounded open to easing yesterday, even though he didn't discuss timing."

"Today, Chair Jay Powell faces Congress in a testimony where he will likely be intensively questioned on the Fed's cautious approach to easing, echoing criticism from Trump. The risks of some dovish hints by Powell and, by extension, downside risks for the dollar have increased after the latest comments by Waller and Bowman, in our view. Crucially, markets may treat any tweaks in Powell's stance as an indication that Trump's political pressure has breached the independence shield of the Fed - and that has the potential to drive substantial USD depreciation. The USD OIS curve is now fully pricing in a September cut, compared to less than 20bp at Monday's open. A July cut is now 23% priced in."

"Even without a dovish surprise from Powell, DXY may well retest the 97.62 lows in the coming days, as markets are much freer to jump back into popular strategic dollar shorts now that geopolitical and oil risks are being priced out. Some support may come from a potential return above 100 in the Conference Board Consumer Confidence, whose June print is published this afternoon, but that may not prove enough to take the dollar on a sustainable recovery."