Republicans are indirectly backing a tougher Fed policy

• Congress is in no hurry to confirm Warsh.
• US-Iran talks have broken down.

The US dollar has launched a counter-offensive thanks to the breakdown of US-Iran talks and a 1.7% month-on-month rise in retail sales in March. The economy is strong, oil prices are high and could rise even further, whilst the futures market is pricing in a 64% probability that the key rate will remain at 3.75% until the end of the year. This is all the more so given that Congress intends to throw a spanner in the works for Fed chair nominee Kevin Warsh.

In his address to lawmakers, Donald Trump’s nominee stated that the Fed should focus on core inflation. Meanwhile, some trimmed indicators suggest that prices are approaching the 2% target, although they are not quite there yet. The issue of the Fed’s independence deserves special attention, and Kevin Warsh has promised to make interest rate decisions independently and has stated that the President has not asked him to cut rates.

The appointment of a new Fed Chair will depend on the judicial investigation into Jerome Powell. While this is ongoing, the Republicans are not prepared to vote for him. The Kalshi forecasting market estimates the chances of a change in the Fed chairmanship by 15 May at 24%, and by 30 June at 65%. As long as Powell remains in the chair, market expectations are drifting towards a tighter policy stance, playing into the US dollar’s hands.

EURUSD continues to react to movements in oil and US indices. The surge in Brent and the fall in the S&P 500 in response to news that Iran had broken off negotiations with the US forced the euro to retreat. The president smoothed over the negativity with a statement on the indefinite extension of the ceasefire, which investors interpreted as a manifestation of TACO, or ‘Trump Always Chickens Out’.

At the same time, the Strait of Hormuz remains closed, which threatens to trigger a renewed rise in Brent prices and exacerbate the eurozone’s problems. Nevertheless, the fear of missing out has driven traders to the point where they are ignoring bad news. How long will this last?

The breakdown of US-Iran talks, as well as the postponement of the Bank of Japan’s expected rate hike, has put the initiative back in the hands of the bulls on USDJPY. 80% of 51 Bloomberg experts predict that the BoJ will hold steady in April. This contrasts with the March survey, when 37% of respondents expected monetary policy to be tightened at the next Governing Board meeting.

The FxPro Analyst Team