'Slightly pessimistic and uncertain' was the characterisation of the US outlook expressed in the Fed's Beige Book released last night and ahead of the next FOMC meeting on 19 June.

Yet business sentiment did not show any clear deterioration over prior Beige Books, and the report also noted that 'there were widespread reports of contacts expecting costs and prices to rise at a faster rate going forward'. This latter point is keeping the Fed resistant to growing political pressure to cut rates, ING's FX analyst Chris Turner notes.

USD is susceptible to further downside

"Softer US data has weighed on the USD a little, even as the trade war has had a relatively quiet week. Instead, there continues to be focus on the progress – or otherwise – of President Trump's tax bill. In an update yesterday, the Congressional Budget Office now expects the bill to add $2.4tr to the US budget deficit over the next decade. Despite this, the US Treasury market is calmer. The 10-year swap spread has narrowed back to 52bp. And bond market volatility is dropping. However, next week's auctions of three and 10-year Treasuries could easily refocus on market stress."

Despite this week's relative calm – including the MSCI world equity index pushing up to a new all-time high – traded FX volatility remains relatively high.

These levels for EUR/USD and USD/JPY are still trading above 8% and 11% respectively for the one month. And, notably, the term structure of the traded volatility curve shows a kink in the two-month tenor – no doubt wary that President Trump's 90-day pause on 'Liberation Day' tariffs ends on 9 July and could be followed by another wave of harsh tariff rhetoric."

Source: FXStreet