[MARKET ANALYSIS] USD boosted on reports that Trump is leaning towards Warsh as Fed Chair, AUD hit as XAU sinks, JPY digests Tokyo CPI

• DXY is on a firmer footing today, following reports that the US administration is leaning towards Kevin Warsh to replace Fed Chair Powell – President Trump said he will make the announcement on Friday. Further details and the specific timing are not yet known, though Trump is scheduled at a few other events later today.
• As it stands, markets have reacted hawkishly to these initial reports; USD is firmer, and USTs are pressured. Warsh is considered the “more” hawkish candidate vs Hassett / Rieder, and is considered more favourable from a Fed independence perspective. Delving into Warsh further, he has advocated for “regime change” at the Fed, and called for the Bank to significantly cut the size of its balance sheet. As it stands, Warsh’s odds have risen to ~94% (prev. 34% pre-report), whilst Rieder has fallen to ~4% (prev. 34.6% pre-report).
• It remains to be seen how much of an impact Warsh (or whoever Trump announces) will have at guiding policy at the Fed. Aside from that, Dollar will take leads from US PPI and a number of Fed speakers incl. Musalem & Bowman, whilst Miran and Waller should appear throughout the day to explain their dissent. DXY currently at the upper end of a 96.16-96.76 range.
• G10s are entirely losing against the firmer Dollar, with clear underperformance in the Aussie as it takes a hit from the pressure seen across underlying metals prices. JPY also towards the bottom of the pile, with USD/JPY currently trading at the upper end of a 152.86-154.38 range. Two factors for the JPY today. a) widening yield differentials as traders weigh a potential Warsh pick, b) softer-than-expected Tokyo CPI, better-than-expected Industrial Production and weak Retail Sales. On the data itself, Tokyo Core CPI printed at 2% (exp. 2.2%) – GS forecasts that national core CPI will print just shy of the 2% mark at 1.9% Y/Y. Analysts at ING opine that the BoJ may not want to hike as inflation decelerates, so may look for evidence (rising Shunto wage negotiations) in the Spring for confirmation that it will pick up in the future – analysts see a 25bps hike in June.
• EUR has had a slew of EZ data to digest throughout the day. French GDP contracted a touch from the prior, whilst Spanish, Italian, and Germany was a little more upbeat. The German figure itself spurred some minor pressure in the single currency at the time, with the pair then trundling lower as the morning progressed. No move to the EZ GDP metrics, which topped exp. but contracted a touch from the prior. At the same time was the release of several German State CPIs, which on balance was more-or-less in-line with what is expected from the mainland figure due at 13:00 GMT. One point to note is that the NRW state held a bit more of a hawkish skew (0.1% M/M vs prev. 0.0%; mainland expects 0.0%). Currently trades in a 1.1894-1.1974 range.

The report indicating President Trump's potential choice of Kevin Warsh as Fed Chair has strengthened the USD and heightened market expectations of a more hawkish Fed. Warsh's advocacy for tightening monetary policy and balance sheet reductions suggests a shift towards a stricter stance that could impact interest rates and the dollar's future trajectory.