What are the market implications of a potential early departure of Fed Chairman Powell? This scenario seemed improbable, but for an hour on Wednesday afternoon, it seemed very real. It was initially reported that a letter had been prepared by Trump and delivered to Republican policymakers, and at one point the White House confirmed that Trump would fire Powell. Shortly thereafter, Trump said it was "unlikely" he would fire Powell, notes ING FX analyst Chris Turner.

Potential for USD consolidation or slight appreciation

"In that hour, we saw the reaction we expected: a steepening of the US yield curve, and a sharp weakening of the dollar. However, the market did not appear to have fully priced in Powell's departure yesterday afternoon. Prices for a September Fed rate cut were barely more than 20 bps, and EUR/USD failed to break above 1.1720 even before Trump's rejection canceled out all market moves."

"This is a clear symptom of the resistance the market has developed to the volatile headlines that have characterized Trump's tenure so far. After yesterday's scare, the bar for responding to threats to the Fed's independence will be even higher."

"On the macro front, yesterday's PPI figure was below expectations, but this failed to offset the fact that Tuesday's CPI reading discouraged the market from pricing in a hike of more than 15 basis points for the Fed's September meeting. Today's US calendar highlights include June retail sales and May's TIC data. We will be closely monitoring the latter data for strong evidence of substantial rotation out of US Treasuries, which could strengthen the longer-term USD bearish argument. However, in the short term, we still favor the prospect of dollar consolidation or a slight rebound in appreciation." (alg)

Source: FXstreet