EUROPEAN FX UPDATE: USD attempts to recover from yesterday's Powell/Trump drama

USD: DXY +0.3%; 98.64

• After a volatile session yesterday, USD is attempting to recoup lost ground and resume its broader recovery seen since early July. Yesterday saw a soft PPI report followed by reports that US President Trump had drafted a letter to fire Powell. The immediate reaction in the FX markets was to sell the USD on account of 1) the perceived likelihood of a lower FFR going forward and 2) the subsequent credibility loss in the US. The move eventually faded following Trump's denial. Some desks noted that the initial move was limited by scepticism that Trump would actually fire Powell and the difficulties for any newly-appointed Fed Chair would have in shifting the consensus view for the FFR on the FOMC. Accordingly, Fed pricing for a September rate cut is relatively unchanged. Attention today will turn back to the data slate with retail sales and weekly claims both on deck, the former will be parsed for evidence of the US consumer retreating in the face of Trump's tariff policy. Elsewhere, TIC data due at 21:00BST will be eyed for any signs of foreign investors shunning US assets. Today's Fed slate is another busy one with remarks due from Kugler, Daly, Cook & Waller. With the exception of Waller, speakers are expected to endorse the Fed's wait-and-see stance. DXY is contained within yesterday's 97.71-98.91 range and just below its 50DMA @ 98.74.

EUR: EUR/USD -0.4%; 1.1594

• It remains the case that the USD leg of the pair is providing the bulk of direction for EUR/USD with incremental drivers from the Eurozone on the light side. Traders await any breakthroughs in EU-US trade talks after US President Trump threatened a 30% tariff on the EU over the weekend. EU Trade Commissioner Sefocvic spoke yesterday with his US counterparts. However, reporting suggests that a breakthrough in discussions is yet to materialise. From a policy perspective, this could feed into next week's ECB rate decision with reporting earlier in the week suggesting that the GC is to discuss a more negative scenario next week than previously envisaged in June after Trump's latest tariff threat. On the fiscal front, Germany has rejected the EU's proposed EUR 2tln budget, setting up a negotiation phase with the European Parliament and European Council. EUR/USD has slipped onto a 1.15 handle but remains within yesterday's 1.1562-1.1772 range.

JPY: USD/JPY +0.5%; 148.58

• After some fleeting upside vs. the USD on account of the Trump-Powell drama seen yesterday, USD/JPY has resumed its recent uptrend. It remains the case that a trade deal between the US and Japan is yet to materialise with both sides currently entrenched in their respective positions. The latest reporting noted that Japanese trade negotiator Akazawa spoke with US Commerce Secretary Lutnick by phone, while Japan and the US reconfirmed each side's position on US tariff measures and engaged in deep interaction. For Japan, the nation is unlikely to cede much ground ahead of Sunday's upper house election. On which, focus remains on the back end of the Japanese curve given expectations that the ruling bloc could lose its majority at this weekend's upper house elections. Such an outcome is expected to lead to looser fiscal policy. USD/JPY is currently tucked within yesterday's wide 146.91-149.18 range.

GBP: GBP/USD -0.3%; 1.3382

• GBP softer vs. the USD but to a lesser extent than most peers. Macro focus for the UK has been on the labour market with the latest jobs data showing an unexpected uptick in the unemployment rate to 4.7% from 4.6%, another contraction in the HMRC payrolls change and stubborn wage growth. Whilst the labour market is clearly loosening, the extent is not as perilous as some had feared given that the prior HMRC payrolls change metric was revised notably higher (from an originally reported sharpest contraction since May 2020) and expectations are that this month's figure could also be nudged higher in next month's release. This, combined with yesterday's hotter-than-expected, means that whilst the BoE is expected to gradually lower rates, there is no strong case for the MPC to accelerate the pace of reductions from its current quarterly cadence. Odds of an August reduction sit at 78% with a total of 50bps of loosening seen by year-end. Cable has slipped back onto a 1.34 handle but is holding above yesterday's low @ 1.3365.

Antipodeans: AUD/USD -0.8%; 0.6471. NZD/USD -0.4%; 0.5921

• Both have fallen victim to the USD with greater losses seen in AUD following the latest Australian jobs data. The release showed an unexpected jump in the unemployment rate to 4.3% from 4.1%; highest rate in 3.5 years. Employment growth was just 2k (exp. 20k) and accompanied by a notable contraction in full-time employment. The release has further cemented calls for another RBA rate cut next month (priced at 87%) with a total of 66bps of loosening seen by year-end. Accordingly, AUD/USD has slipped back onto a 0.64 handle and moved back below its 50DMA @ 0.6491 with a session low @ 0.6462. NZD/USD has hit a new low for the month @ 0.5910.

17 Jul 2025 - 10:20- ForexData- Source: Newsquawk