Markets rattled as Fed receives grand jury subpoenas – Scotiabank

Markets have started the week with something of a jolt after Fed Chair Powell revealed in a statement Sunday evening that the central bank had been served with grand jury subpoenas. Powell said the investigation was related to the ongoing renovations at the Federal Reserve but ’should be seen in the broader context of the administration’s threats and ongoing pressure for lower rates’, Scotiabank’s Chief FX Strategists Shaun Osborne and Eric Theoret report.

USD slides, equities and Treasuries weaken

“‘While the president denied any knowledge of the investigation, markets are assuming that the move represents another threat to the Fed’s policymaking independence. It also perhaps raises the risk that the president’s pending decision on Fed Chair Powell’s replacement results in the nomination of someone who is at least perceived to be close to the White House. Additionally, President Trump commented that credit card lenders had to cap rates at 10% for a year or risk being in ‘violation of the law’, although which law he is referring to is unclear.”

“The USD is down, US equities futures are weaker and US Treasurys are lower, with the yield curve steepening slightly. The apparent threat to the Fed’s independence has lifted havens, with the CHF leading the major currencies higher on the day. Gold has jumped 1.7% to a new high reflecting concerns that the Fed may allow the US economy to ‘run hot’, keeping inflationary pressures simmering. Weekend developments overshadow the upcoming US inflation data prints and perhaps sharpen focus on the potential for the president to unveil his choice to replace Chair Powell in the coming days.”

“Polymarket trends indicate a small uptick in bets on CEA head Hassett getting the nod. The slide in the USD today should effectively cap and reverse the recent pick up in the DXY generally. Today’s drop and the risk that the Washington maneuverings continue to weigh on its performance oddly come right on cue for the USD to continue to roughly track its pattern of trade in the early years of the first Trump administration when the DXY fell close to 5% between mid-Jan and mid-Feb 2018.”