This morning's market report highlights significant movements and political developments that could shape the near future:

Pound Hits Multi-Year High:

• The British Pound (GBP) has achieved a significant milestone, breaking above 1.37 against the US Dollar (GBPUSD) for the first time in three years. This strong performance is largely attributed to a broader weakness observed across the US Dollar.

Concerns Over Fed Independence:

• A notable development is the rising concern surrounding the independence of the Federal Reserve. This comes after President Trump publicly stated he is considering replacing Chair Jerome Powell early, sparking discussions about potential political influence on monetary policy decisions.

NATO Commits to Mutual Defence

• At the recent summit, President Trump confirmed the US commitment to NATO's mutual defence pact (Article 5). This reaffirmation arrived as allied leaders pledged to boost their defence spending, addressing a key long-standing demand from the US.

What This Means for You:

The Pound's ascent reflects the Dollar's vulnerability amidst shifting expectations for US interest rates and political commentary around the Fed. The discussion regarding Fed independence introduces a new layer of uncertainty for the US economic outlook. Meanwhile, the renewed commitment to NATO's core defence principle should provide a degree of geopolitical stability, at least for now.

Today’s Market Update:

Today's trading landscape presents a dynamic picture, with currency movements driven by a mix of cautious sentiment, evolving geopolitical narratives, and the ongoing dialogue around central bank policy.

Dollar Under Renewed Pressure:

• The US Dollar remains on the defensive this morning, continuing to retreat as Treasury yields sink.
• Despite recent signals from Fed speakers like Powell, Williams, and Barr suggesting a more patient approach to rate cuts (with Powell indicating he wouldn't support a cut until early autumn due to tariff impact risks on CPI), markets are currently pricing in a ~30% chance of the Fed delivering three base rate cuts this year. This divergence between market expectations and official commentary is a key driver of Dollar weakness.

Fragile Calm in Geopolitics:

• Global equities showed mixed performance yesterday, retracing some earlier gains. This follows a period of improved risk sentiment surrounding the Israel-Iran ceasefire, which appears to be holding for now.
• Oil prices remained relatively steady around the $65/bbl level yesterday. President Trump has stated the US will hold a meeting with Iran next week, though he downplayed the need for a diplomatic agreement on Iran's nuclear program.
• However, reports from the Pentagon that recent US airstrikes didn't destroy core underground nuclear components, despite White House dismissals, add a layer of underlying geopolitical uncertainty.

Pound and Euro Strengthen:

• Amid the broader USD weakness, the British Pound (GBPUSD) rallied 0.7% overnight, trading around 1.3740, breaking above the 1.37 mark for the first time in three years.
• Similarly, the Euro (EURUSD) has now moved above the 1.1700 level this morning. These movements underscore the Dollar's vulnerability in the current environment.

Fed Independence & Future Outlook:

• Concerns about the Federal Reserve's independence have intensified following a Wall Street Journal report that Donald Trump is considering nominating the next Fed Chair early, potentially undermining current Chair Powell's term which expires in March 2026. While the mentioned potential candidates (Warsh, Hassett, Bessent) are not new, the possibility of an early nomination raises questions about future policy decisions and has increased the likelihood of a more dovish path from the Fed.
• Barclays Research maintains its call for a single 25bp cut this year in December, even as the market is now pricing in approximately 64bp of cuts by year-end.

NATO Defence Commitments:

• At the recent NATO summit, leaders endorsed a historic plan to increase defence spending from 2% to 5% of GDP by 2035, earning praise from President Trump. Trump assured allies of US commitment to NATO's mutual defence pact, easing earlier concerns. The summit's statement notably included only limited references to the Russia threat and support for Ukraine, reflecting Trump's stance.

What This Means for You:

The Dollar is facing headwinds as markets anticipate more aggressive Fed rate cuts than the central bank's recent messaging suggests. This divergence, coupled with ongoing geopolitical complexities (despite a fragile ceasefire), keeps currency markets active. The Pound and Euro are benefiting from the Dollar's retreat. Keep a close watch on further Fed communications and any new developments from the Middle East or US political landscape.

26th June 2025

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