USD: DOJ drops criminal investigation ahead of FOMC meeting

The major foreign exchange rates have remained relatively stable overnight ahead of a busy week of central bank policy updates including the BoJ, Fed, BoE and ECB. At the same time, market participants continue to wait for any signs of progress in talks between the US and Iran to re-open the Strait of Hormuz. Investor optimism has been boosted overnight by an Axios report stating that Iran has given the US a new proposal to re-open the Strait and end the war that includes postponing nuclear operations according to a US official and two people with knowledge of the matter. The plan calls for extending the ceasefire so the parties can work toward a permanent end to fighting. Nuclear talks would then come later, only after a US blockade of the Strait is lifted. According to the report, Pakistani mediators have given the proposal to the White House but it is unclear if the US wants to explore it. President Trump has acknowledged a new plan from Iran, saying they quickly sent over fresh proposal after he told his envoys to stand down on a trip to Pakistan over the weekend. Iranian Foreign Minister Abbas Aragachi met mediators in Pakistan on Saturday, and has since arrived in Russia for talks with President Putin. The risk of more prolonged negotiations to re-open the Strait have lifted energy prices over the past week. The price of Bent hit a high of USD107.97/barrel overnight. However, spill-overs into the foreign exchange market have been limited. The US dollar staged only a modest rebound last week and still underperformed the Norwegian krone, Canadian dollar and pound amongst G10 currencies.    

The US dollar pared some of its gains at the end of last week after it was announced that US Justice Department has dropped its criminal investigation into Federal Reserve Chair Jerome Powell. US Attorney for the District of Columbia, Jeanine Pirron announced that her office was closing the investigation and referring the matter to the Federal Reserve’s Inspector General instead. She did emphasize though that the DOJ could re-open a criminal investigation if new facts emerge, but for now the matter rests with the Fed’s internal watchdog. The announcement has been welcomed by Senator Thom Thillis who stated that he received assurances from the Justice Department that the criminal case against Chair Powell and the Fed was “completely and fully settled”. With the assurances, he stated that would now support Kevin Warsh’s appointment to the be the next Fed Chair. A vote on Kevin Warsh’s confirmation is scheduled to take place on 29^th April.

The developments make it more likely that Kevin Warsh will replace Jerome Powell as Fed Chair when his term expires on 15^th May, although it remains unclear if Jerome Powell will also step down from the Board of Governors given the lingering threat to re-open a criminal investigation. The US dollar and US yields initially fell in response to the announcement reflecting market expectations that it would open the door to looser further Fed policy once the energy price shock has eased. The US rate market still judges that there is a higher probability that the next Fed policy move will be a cut rather than a hike remaining a headwind for the US dollar.

SPECULATIVE USD POSTIONING HAS BECOME MORE BALANCED RECENTLY  

Source: Bloomberg, Macrobond & MUFG GMR

GBP: Support from hawkish UK rate repricing offsets domestic political risks 

The pound outperformed last week resulting in EUR/GBP falling to a fresh low overnight of 0.8649. The pound has been supported by the hawkish repricing of BoE rate hike expectations encouraged by further evidence of stronger UK growth momentum at the start of this year while underlying inflation pressures remained uncomfortably high at the start of the energy price shock. While the BoE will want to avoid another outsized hawkish market reaction similar to after last month’s MPC meeting, it will be difficult to avoid providing another hawkish policy message with limited room to look through the inflation shock. We expect a hawkish hold this week with two MPC members Chief Economist Pill and MPC member Mann voting for a hike.

Support for the pound from higher UK rates is currently offsetting headwinds from higher energy prices while the UK economy is holding up, and domestic political risks ahead of the local elections. The Daily Mail reported over the weekend that former Deputy Prime Minister Angela Rayner told Labour MPs the time to oust Prime Minister Starmer is “now or never”. Prime Minister Starmer could face a critical Commons vote tomorrow. Speaker Sir Lindsay Hoyle is expected to allow a Commons vote on whether to refer him to the Privileges Committee over claims he misled the House about the appointment of Lord Mandelson as US ambassador. Whether Hoyle will allow the vote is expected to be announced today. If the vote takes place, it would be treated politically as a de facto confidence vote in PM Starmer’s leadership. The Daily Mail went on to add that Angela Rayner, Greater Manchester Mayor Andy Burnham and Health secretary Wes Streeting are all now ready to launch leadership campaigns if PM Stamer announces he is standing down after the local elections on 7th May. Domestic political developments have the potential to trigger at least a temporary sell-off for the pound in the coming weeks.