US Dollar: Warsh risks skewed to cuts – Commerzbank

Commerzbank’s Antje Praefcke argues that interest rate differentials are again driving the Dollar, with USD reacting strongly to weaker US data as markets reassess new Fed Chair Kevin Warsh. She suggests limited scope for further hikes but growing risk of earlier rate cuts, leaving USD more vulnerable to negative data than supported by positive surprises.

Fed uncertainty weighs on Dollar outlook

"Nevertheless, in my view, the risks are asymmetrically distributed. Despite the hawkish surprise at the start of his tenure, the risk is likely growing that, in the face of weak data and falling inflation, Warsh will want to cut interest rates faster and more aggressively. Even if the USD is likely to hold up well for now, it will probably suffer more from weak data than it will appreciate from positive data."

"This is because there is hardly any room for expectations of further rate hikes amid falling inflation rates; rather, there is more room for earlier rate cuts if the data cooperates and Warsh’s line of reasoning can convince even more members of the FOMC."

"In addition to disappointing data, statements or actions signaling lower interest could therefore increasingly weigh on the USD. Attempts by the US president to change the composition of the FOMC in favor of a more accommodative monetary policy could also intensify again. Finally, the legal proceedings involving Lisa Cook continue, even though the Supreme Court has temporarily halted her removal and she is allowed to remain in office."

"The FOMC meeting at the end of the month is likely to be particularly interesting, as members’ opinions could once again diverge more widely - in contrast to the hawkish unity that will be reflected in the minutes of the last Fed meeting in June, which will be published tonight."