Synopsis:

ANZ sees further downside risks for the USD as soft inflation and activity data persist, and political developments—such as Powell’s potential replacement—raise questions about Fed independence. Short-term USD rallies are seen as opportunities to re-enter short positions.

Key Points:

• Lack of Fundamental Support:
  • Post-ceasefire USD weakness shows reliance on geopolitical risk.
  • Without fresh inflation from tariffs, USD is vulnerable to further softness.

• Fed & Political Uncertainty:
  • Powell’s testimony affirms no near-term cuts, but some Fed members (e.g. Waller, Bowman) are turning more dovish.
  • Early announcement of Powell’s dovish replacement (if by Trump) could undermine Fed credibility and weaken the USD.

• Macro Signals Turning:
  • US inflation surprise index is the lowest in the G10.
  • Soft US data (PMIs, retail sales) suggest hard data may soon disappoint as well.
  • Consumer sentiment increasingly reflects caution over tariff effects.

• Tariff Policy Impact:
  • Markets skeptical that US policy risks will fade even with renegotiation.
  • Trade developments with China, India, etc., remain key watchpoints.

Conclusion:

ANZ remains strategically bearish on the USD. With fragile economic fundamentals, rising political risk, and lack of inflationary follow-through from tariffs, they recommend fading USD rallies, particularly as data flow continues to deteriorate.