The U.S. dollar is once again under pressure as traders digest the implications of a potential shift in Federal Reserve leadership and the prospect of unconventional economic policies. With the possibility of a Trump-aligned Fed becoming reality, market participants are questioning how monetary policy, inflation, and fiscal direction may evolve putting the greenback at risk of a further downturn.
Focus Shifts Beyond Powell as Traders Eye Trump-Influenced Fed
Market attention is no longer solely fixed on Jerome Powell’s leadership. Instead, it’s drifting toward what Federal Reserve policy might look like if a new, more Trump-aligned chair were to take over. Concerns about ballooning fiscal deficits, rising tariffs, and potential unorthodox strategies like yield curve control have re-entered the conversation, weighing on U.S. Treasuries and the dollar alike.
The market reaction suggests that investors are not merely responding to criticism of Powell. They are pricing in a scenario where inflationary pressure persists due to import tariffs, while simultaneously grappling with the prospect of aggressive rate cuts. These rate cuts, if enacted under conditions of elevated inflation, would mark a notable policy deviation and could spook bond markets, accelerating the sell-off in long-duration U.S. Treasuries.
Unconventional Policies and Fiscal Anxiety Compound Dollar Weakness
With U.S. deficits already reaching multi-trillion-dollar levels annually, skepticism over Washington’s ability to rein in spending is growing. If fiscal stimulus expands further without corresponding revenue increases, the financing burden will intensify. And if the Fed under new leadership steps in to suppress bond yields via yield curve control, it would effectively inject more liquidity into the system, pushing the dollar lower as a side effect.
Such a policy stance could lead investors to reassess U.S. assets, particularly if foreign buyers begin to shy away from funding U.S. debt. This uncertainty is manifesting in the FX markets, where traders appear to be positioning for a prolonged period of dollar weakness.
Until the fiscal and policy trajectory becomes clearer, it seems likely that the dollar will struggle to regain its footing aside from occasional short-covering rallies.
AUD/USD Eyes Breakout as Technical Strength Builds
On the technical front, AUD/USD is trading at a crucial junction. The pair is pressing up against a well-established upward trendline that has its roots in the October 2022 lows. This level has historically served as both support and resistance, making it a meaningful battleground for bulls and bears.
The price action in early April, marked by a bullish engulfing candle on the weekly chart, hinted at renewed upside strength. Since then, momentum indicators such as the RSI and MACD have turned more supportive, even if the MACD remains marginally below the neutral line.
Should AUD/USD successfully breach and sustain a move above this key trendline, it could attract more bullish interest, potentially paving the way for a rally toward the .6550 region an area of consolidation in late 2024. However, failure to hold above the trendline would invalidate the bullish setup and raise the likelihood of renewed selling pressure.
USD/CAD Holds the Line but for How Long?
In contrast, USD/CAD is showing signs of fragility as it tests a multi-year support line that dates back to May 2021. Monday’s bounce off this uptrend mirrored past instances where the pair found buying interest, but this time around, momentum appears to be shifting.
Both RSI and MACD indicators suggest growing bearish momentum. If USD/CAD breaks convincingly below this long-standing trendline, it could spark a deeper decline, potentially dragging the pair toward the 1.3600 level or even the September 2024 low near 1.3420.
Still, the trendline has proven resilient in the past. A failure to break lower could trigger a short-term squeeze to the upside, with potential resistance near 1.3978. But given the macro backdrop, any rallies may ultimately prove to be selling opportunities.
