There is anecdotal evidence that FX hedging in USD-denominated assets has increased at a time when central banks and other large institutions may be seeking alternatives to the dollar due to Trump\u2019s policies. We believe this narrative is already largely embedded into a dollar risk premium that is unlikely to disappear entirely in the near future. Assuming concerns about Powell\u2019s removal, tariffs and the deficit do not increase that risk premium, it would be up to traditional drivers \u2013 primarily short-term rate differentials \u2013 to take EUR\/USD closer to 1.20.<\/p>\n
We are not major subscribers to the view that the ECB will stay on hold until December (a September cut is underpriced in our view), but admit that the latest hawkish communication means market pricing may not be revised significantly to the dovish side at least for some weeks. If something is to move EUR:USD rate gaps in the near term, that will most likely come from the Fed side: upcoming data and Fedspeak will offer a reality check on rising dovish bets.<\/p>\n
Based on the latest betas in our short-term fair value model, a 20bp drop in the 2-year USD OIS with unchanged ECB pricing justifies roughly two big figures higher in EUR\/USD. However, we think the impact of a dovish U-turn by the Fed could be asymmetrically negative for the dollar. That\u2019s because there is a tangible risk that markets will see a summer rate cut as a sign that Trump\u2019s dovish arguments have breached the independence shield of the Fed.<\/p>\n
Obviously, how markets interpret an earlier-than-expected cut by the Fed would still depend on how data shapes the policy discussion. But the bar for Fed independence concerns isn\u2019t that high, and the dollar\u2019s sensitivity to the topic can spike rapidly, as we are observing now. <\/p>\n","protected":false},"excerpt":{"rendered":"There is anecdotal evidence that FX hedging in USD-denominated assets has increased at a time when central banks…\n","protected":false},"author":2,"featured_media":215568,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3091],"tags":[51,2441,16,15],"class_list":{"0":"post-215567","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-markets","8":"tag-business","9":"tag-markets","10":"tag-uk","11":"tag-united-kingdom"},"share_on_mastodon":{"url":"https:\/\/pubeurope.com\/@uk\/114749060466405720","error":""},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/posts\/215567","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/comments?post=215567"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/posts\/215567\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/media\/215568"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/media?parent=215567"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/categories?post=215567"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/tags?post=215567"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}