The market today is likely to react to news reports of Trump mulling over the idea of selecting the replacement for Powell by September or October, raising questions over Fed’s credibility (especially if any new appointment is politically motivated). In response, the DXY (US dollar index) moderated to 97.38 levels at the time of writing while the EUR/USD staged a strong recovery, remaining just shy of 1.17 levels.
While some of this dollar decline might be an over-reaction and could reverse next week, we do continue to hold on to our view that the DXY could trend lower in 2025. We expect the Fed to most likely restart its rate cut cycle in September or at least soften its tone on rates and inflation by then, further adding to the US dollar’s decline.
On the data front, US durable goods orders for May and US jobless claims data for last week out later today will be of interest to the market.
Rupee: With the moderation in the US dollar index, the USD/INR pair is expected to trade with an appreciation bias today. We see a range of 85.50-86.0. The pair weakened marginally to close at 86.0775 on Wednesday. The month-end demand for dollar by importers weighed on the rupee, however, increased risk appetite and momentum in the equity market cushioned the decline.
Fed Powell Comments: Federal Reserve Chair Jerome Powell signalled that Fed prefers to remain cautious on rates highlighting potential risk of a persistent inflationary pressure due to tariffs on Wednesday. Powell said he expects inflation to increase in June and July as the impact of tariff percolates to the consumers. However, he also mentioned that if inflationary pressures turn out to be transitory or managed, then this could have implications for the Fed’s decision in September. Powell’s comments did little to change expectations of rate cuts this year, with markets continuing to price in 2 rate cuts in 2025. We do not believe that a July rate cut is on the cards and see September as the earliest meeting when the Fed could look at lowering rates.
EUR: The EUR/USD pair rose and was last trading close to 1.17 levels this morning. The EUR/USD pair has appreciated over 1.4% this week on easing geopolitical tensions and a lower US dollar. The movement in the pair aligns with our somewhat bullish view on the EUR/USD pair. We hold on to our forecast of 1.14-1.18 for the pair for Q3 2025. That said, in the very near-term, the recent increase should be seen as an opportunity to hedge as multiple events in July (including passage of US tax bill, Fed meeting, Tariff deadline) could continue to cause volatility for the pair.
JPY: The USD/JPY pair was marginally weaker this morning, trading under 145 levels compared to Wednesday’s close of 145.25 as BoJ’s meeting minutes for its June meeting showed policymakers prefer to remain cautious amid uncertainty on the impact of US tariffs on Japanese economy.
Oil: Benchmark brent crude prices recovered over 1% as traders assessed a fragile ceasefire between Israel and Iran while healthy demand in the US where crude oil inventories declined, also provided support. Oil prices could ease further on growth and demand concerns if the ceasefire in the Middle East holds. Brent crude was trading close to $67.93 per barrel at the time of writing.
Bond yields: Domestic bond yields increased on Wednesday after the RBI announced VRRR of INR 1 lakh crore for Friday to mop up excess liquidity from the system. The 10-year yield was up 4 bps to close at 6.2873% on Wednesday versus previous close of 6.2504%. We expect the 10-year paper to trade in the range of 6.25%-6.30% this week.
System Liquidity: Liquidity surplus stood at INR 2.59 lakh crore on Tuesday. Liquidity surplus is expected to remain comfortable for the remaining week with support expected from month-end government expenditure. However, the VRRR of INR 1 lakh crore scheduled for Friday could bring the liquidity surplus closer to INR 1.5 lakh crore.