US Dollar: Fed repricing after hawkish pivot – Scotiabank

Scotiabank strategists Shaun Osborne and Eric Theoret report that the US Dollar (USD) is trading mixed as renewed Iran tensions hit risk appetite, with stocks falling and Oil (Brent) jumping 6%. They argue markets are overreacting to June’s hawkish Federal Open Market Committee (FOMC) pivot, noting Chair Warsh’s criticism of the dots and his reluctance to front-run Federal Reserve (Fed) reform task forces, while 37 bps of tightening priced by December still looks excessive.

Iran tensions and FOMC expectations

"Risk appetite has slumped, with global stocks down sharply."

"The dollar picked up some support earlier in London trade following the president’s ceasefire comments, but gains are limited and the DXY is still trading at a small net loss on the day."

"Developments leave markets pondering whether this is a brief and temporary rupture in the peace process or a prelude to another sustained campaign against Tehran."

"That decision helped add to broader dollar gains that were accumulating since the early May rebound but we think the market is overreacting."

"Swaps have retraced some of the buildup of Fed hike expectations that developed in the wake of the June meeting but 37bps of tightening implied in OIS by Dec still looks way too rich."