Dollar weakness, Fed capital shift, and fragile risk sentiment dominate

Global financial markets are navigating a complex environment as shifting US monetary policy expectations, proposed regulatory rollbacks, and fragile investor sentiment weigh on major asset classes. Below is a detailed breakdown of the latest developments:

Dollar declines on Fed speculation and political uncertainty

The US dollar remains under pressure, extending a four-day slide driven by expectations of imminent rate cuts and rising political risks:

• The Bloomberg Dollar Spot Index fell to its lowest level since April 2022, down 0.4%.
• A Wall Street Journal report suggests President Trump may announce a replacement for Fed Chair Jerome Powell by September or October.
• Market participants expect the next Fed chair to align with Trump’s calls for aggressive rate cuts, intensifying bearish sentiment on the dollar.
• Traders are now pricing in 62 basis points of rate cuts by year-end, up from 50 basis points last week.
• Seasonal trends also weigh on the dollar, with July historically marking its weakest month, averaging a 0.6% decline since 2005.

Market impact:

• Asian currencies outperformed, with the offshore yuan and Japanese yen rising.
• European currencies gained ground, with the euro and British pound both climbing to multi-year highs.
• Dollar weakness has broad implications for emerging markets, commodities, and global risk appetite.

The Federal Reserve proposes loosening key bank capital rules

The Fed unveiled plans to reduce the enhanced supplementary leverage ratio (eSLR) requirements for major US banks:

• Holding company capital requirements may drop to 3.5%–4.5% from 5%, with subsidiaries facing similar reductions from 6%.
• The proposed changes, backed by Fed Chair Jerome Powell, aim to boost banks’ capacity to hold Treasuries and act as market intermediaries.
• Critics, including Senator Elizabeth Warren and former Governor Michael Barr, warn the revisions may weaken financial stability, potentially reducing bank-level capital by $210 billion.
• The plan has sparked a 60-day public comment period, with the industry expected to push for further exemptions, especially for Treasury holdings.

Market impact:

• Regulatory easing could improve Treasury market liquidity but raises concerns about systemic risks during stress events.
• Financial sector equities may benefit, but long-term investor caution persists regarding potential banking vulnerabilities.

Treasury yields decline amid Fed uncertainty and political risks

Bond markets reflect the growing anticipation of US monetary easing:

• 10-year Treasury yields dropped to 4.27%, their lowest level in over a month.
• Fed officials, including Michelle Bowman and Christopher Waller, signaled openness to rate cuts as soon as July if inflation remains subdued.
• However, Powell emphasized uncertainty around the inflationary impact of Trump’s tariff policies, urging patience on rate decisions.
• The Fed’s proposal to ease capital rules added complexity, with potential implications for bond market functioning.

Commodities: Mixed signals as oil stabilizes, precious metals eye volatility

• Oil prices rose for a second consecutive day amid Middle East ceasefire hopes, though market sentiment remains fragile.
• Brent and WTI crude gained modestly, with Russia signaling willingness to consider further OPEC+ output hikes.
• Platinum prices surged to the highest since April 2022, driven by supply constraints and industrial demand recovery.
• Gold remains supported near recent highs, underpinned by lingering geopolitical risks and shifting rate expectations.

Equities mixed: Asia leads, Europe cautious, US futures resilient

• Asian equity benchmarks posted broad gains, led by Japanese defense and technology stocks following NATO’s defense spending boost.
• European markets opened cautiously, reflecting regulatory uncertainty and fragile sentiment.
• US stock futures climbed, bolstered by Nvidia’s record-breaking rally and expectations of lower rates.
• Defense and technology sectors remain focal points amid geopolitical realignments.

Cryptocurrency markets: Cautious recovery amid volatility

• Bitcoin rebounded slightly, though remains below key technical levels after recent losses.
• Ethereum outperformed, reflecting ongoing appetite for alternative assets amid dollar weakness.
• Digital assets remain highly sensitive to macro headlines and liquidity dynamics.

Macro risks and policy watch

• Uncertainty surrounding Fed leadership and Trump’s influence on monetary policy weighs heavily on investor sentiment.
• Geopolitical tensions, particularly in the Middle East, continue to pose headline risks for oil and global stability.
• The Fed’s regulatory proposals, though supportive of Treasury markets, may reintroduce systemic vulnerabilities.
• Market participants are closely watching upcoming economic data, Fed communications, and political developments for direction.

Strategic outlook:
In this fluid environment, it is recommended that investors:

• Maintain diversified exposure with an emphasis on defensive assets.
• Hedge currency risks, particularly dollar weakness.
• Monitor policy developments from the Fed and global regulators.
• Remain nimble, given elevated headline sensitivity and potential for volatility spikes.

Markets are entering a period of recalibration, with sentiment hinging on policy clarity, geopolitical stability, and central bank actions.

Prepared by Nour Hammoury, Chief Market Analyst at SquaredFinancial
Nour is an investor, independent market strategist, and financial advisor. He holds a BA in Finance and Banking Science from Al-Ahliyya Amman University and a CFTe in Economics from the International Federation of Technical Analysts. He has more than 15 years of experience in forex, stocks, and global economic developments, as well as central bank policies and intermarket analysis. He appears regularly on major international TV networks, such as BBC, Al-Jazeera, Al Hurra, CNBC, and Bloomberg, holding open discussions and sharing insights and readings of the markets and trends.

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