Firing Powell risk is likely to persist

USD: Firing Powell gets real

The US dollar has now recouped all of the losses suffered yesterday when news broke that President Trump was planning to fire Fed Chair Powell. We suspect this theme is set to continue to linger in the markets as a substantial risk that will likely limit the scale of dollar gains from here. For sure, US dollar downside risks have jumped on the back of this development. Trump wants to fire Powell – that much seems pretty clear – and hence this uncertainty underlines risks of more lasting damage for the US economy, which will result in a steeper US yield curve as the Fed’s inflation-fighting credibility suffers, and undermine the US dollar. The US dollar has already fallen 10% this year through to the start of July and Leveraged Funds are now modestly short the dollar so admittedly appetite for selling the dollar has diminished but this action has certainly darkened the already bleak out for the dollar through this year and into 2026.

The market moves will likely also be contained until we get further clarity on Trump’s belief in how strong the legal case is for firing Powell. The dollar fell 1.2% in response to the news of Trump’s possible push to fire Powell, touted to some members of the Republican party but rebounded when Trump stated it was “unlikely” he would fire him.

In a world so sensitive to inflation risks, this is a dangerous idea. Fears over inflation are building again and this will exacerbate those fears. The 10-year breakeven rate is 14bps higher this month trading above the 2.40% level. A breach of the 2.50% level would highlight more intense concerns not seen since the global inflation shock period and would weigh further on dollar performance.

The legal case for firing Powell will rest on proving “cause” with Trump supporters encouraged by accusations of misleading Congress and misusing funds in relation to renovation works on two Fed buildings. Powell dismissed these reports and denied the existence of luxury features, stating “there’s no VIP dining room, there’s no new marble. There are no special elevators..no roof terrace gardens”. Original planning documents to the National Capital Planning Commission have been widely reported as including such details. Powell has also been accused of modifying the plans without correct approval with the project USD 700mn over budget.

The Federal Reserve Act states that Board Governors can run for a 14-year term “unless sooner removed for cause by the President”. While the Act does not define what “cause” is, the White House could certainly cite misleading Congress as a reason. We would then potentially enter a period of uncertainty if that interpretation was legally challenged. But this is now the second time the topic of firing Powell has moved the markets abruptly – the first was 21^st April but Trump eventually denied it the following day. This is inevitably doing damage and the more frequent the market speculation becomes, the more the risk will be priced, damaging investor confidence.

The question now is whether Trump and his supporters drop this idea or keep it in the markets’ focus and push it further. We suspect this theme isn’t going to go away  and could escalate further and threatens a further hit to confidence in US assets and the dollar. For now Trump’s denials have helped prompt a retracement – but for how long?

US 10-YEAR BREAKEVEN RATE DRIFTING HIGHER AGAIN – TRUMP’S PUSH TO FIRE POWELL WILL PUSH YIELDS HIGHER

Source: Bloomberg, Macrobond & MUFG GMR

GBP: Jobs data adds to reason for caution

After trading close to the 0.8700-level on Tuesday, pound selling has stalled with the data flow suggesting limited prospects of the MPC picking up the pace of monetary easing from the current quarterly pace. Today’s jobs and wages data will add to that belief following the higher than expected inflation data yesterday. One of the key factors that had seen the MPC communication focus more on the “slack” that was opening up in the labour market was due to the PAYE employment data last month revealing a 109k drop in employment. Today’s data showed that was revised away – the drop now was -25k, a massive upward revision. The data does tend to get revised notably and it does the change the picture somewhat. The revision means year-to-date the economy has seen 141k jobs lost – last month the year-to-date estimate was close to 250k.

That said, the MPC’s view that “slack” is opening up in the labour market which should help bring down wage inflation is unlikely to have changed because of today’s data. The 41.4k drop in jobs reported today was still the largest since covid and in the last twelve months, the employment data has fallen in nine of those months – jobs lost in the last year totalled 178k. The wage data released also backed the MPC’s views as well with the 3mth average YoY rate falling from 5.4% to 5.0%. Private sector wage growth slowed to 4.9%, helped by the one-month YoY rate declining to 4.4%, the lowest rate since November 2021.

With wage growth slowing and the labour market deteriorating, a rate cut on 7^th August is very likely and is close to 90% priced. There is very little priced for an additional cut in September and that pricing makes sense following the CPI and jobs data this week. The pound may benefit from this over the short-term but we still see scope for the BoE being more active relative to the ECB and risks remain higher through the remainder of the year of the BoE turning more active in cutting than currently priced although for now we maintain our view that the MPC will continue with its “gradual and careful approach” to monetary easing.

JOB CUTS LESS SEVERE AFTER REVISION BUT STILL A WEAKENING TREND

Source: Bloomberg, Macrobond & MUFG GMR

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com