Synopsis:

Credit Agricole believes that despite recent political pressure, the upcoming May FOMC meeting offers the Fed a chance to assert its independence, which could help steady the USD. However, with ongoing concerns about stagflation and limited progress on major trade deals, sentiment toward the USD is still fragile.

Key Points:

• Fed to Hold Steady and Reassert Independence:

  • Trump has backed away from removing Fed Chair Powell, but the threat of political interference has damaged investor confidence.

  • The FOMC is likely to stand by Powell's policy stance and hold rates steady, which may bolster USD credibility.

• Stagflation Concerns Remain Elevated:

  • Markets remain wary of Trump’s policies, which have heightened risks of simultaneous inflation and growth slowdowns.

  • Investors need to see signed trade deals and tariff rollbacks before regaining trust in the USD.

• Trade Deals in Focus:

  • Treasury Secretary Scott Bessent revealed 15–17 countries are negotiating deals—China is not one of them.

  • Ongoing trade deal headlines will likely drive FX volatility ahead of and after the Fed decision.

• ISM Services and Valuation Signals:

  • Markets will also watch the April ISM Services Index for signs of growth resilience.

  • Credit Agricole notes the USD is undervalued relative to rate spreads, suggesting room for a tactical bounce.

Conclusion:

While political noise and trade uncertainty continue to weigh on the greenback, the Fed’s reaffirmation of independence next week could provide support. If combined with positive data and trade progress, the USD could regain composure in the near term, even as longer-term structural risks remain.