A growing financial storm could hit the US dollar and Treasuries if President Donald Trump removes Federal Reserve Chair Jerome Powell from his position. According to Deutsche Bank, this scenario is being severely undervalued by the market, and if it occurs, the repercussions could be swift and brutal. The warning came from George Saravelos, the bank's global head of currency strategy, who told clients that the probability of Powell being ousted is too low, despite Trump continuing to ramp up pressure. Trump has already made it clear that he wants aggressive rate cuts and has hinted that he might name a replacement before Powell's term ends. Meanwhile, Powell has said he has no intention of stepping down, even if the president asks him to. He acknowledged cost overruns related to the building renovation but stated that claims of deception are 'totally misleading.' Powell's exit would hit the dollar and bonds hard. Saravelos said that if Trump goes ahead with Powell's ousting, the trade-weighted dollar could fall by between 3% and 4% in a single day. He also expects Treasuries to sell off, pushing yields up by 30 to 40 basis points. Such a blow would carry a permanent risk premium over both assets. He pointed to Polymarket, a cryptocurrency-based betting site, where the odds of Powell's ousting are below 20%, suggesting that investors have not recognized the danger. But it's not just about prices. Saravelos said the global financial system would feel the impact. Investors would likely see Powell's removal as a blow to the Fed's independence, throwing the institution into what he called 'extreme institutional coercion.' The Federal Reserve, at the top of the dollar-based monetary system, also controls swap lines with other central banks. If these become politically tainted, confidence in the Fed could collapse far beyond the US. How markets respond after the initial shock depends on whether other Fed officials defend the institution and what kind of person Trump chooses as Powell's successor. Saravelos also pointed out the fragile external financing position of the country as a key risk. If Powell's exit triggers a deeper panic, the dollar and bond markets could suffer even larger and more chaotic moves than currently predicted. Traders are ignoring the red flags on the calendar and the noise from tariffs. While Powell's position hangs by a thread, investors are acting as if everything is fine. Stocks are rising. Bitcoin is on the upswing. Credit markets are calm. The S&P 500 has jumped about 30% since its April lows during the last tariff panic. It has recorded eight all-time highs this year. But beneath the surface, things are changing. The index recently pulled back from overbought territory. The sectors that had lagged are getting attention, while those that were soaring are cooling off. Strategas Research noted that the bottom 20% of stocks during the past year gained 6.2% as they entered Friday. The top performers, meanwhile, went nowhere. Cyclical stocks and adjusted credit spreads suggest that investors are not too worried about a recession. Even Citi’s US Economic Surprise Index has returned to positive territory. Globally, markets look strong. Nvidia reached a $4 trillion valuation, but traders did not celebrate as they did when it crossed $3 trillion last year. Renaissance Macro Research said that the market's reaction now feels more contained. The Trump team's tariff threats returned last week, but nobody flinched. Unlike in the spring, traders now believe that only 25% of S&P 500 profits are exposed to tariffs, according to Deutsche Bank estimates. The market's relaxed posture could be risky. It assumes that Powell stays, that the economy avoids a recession, and that the AI boom continues to fuel corporate spending. It's a best-case scenario, not too different from 1998-1999, when an almost bear market was followed by a wild rally driven by technology. The danger is that traders think this clarity is permanent. It is not. And there is a timing issue. Data from Bespoke Investment Group shows that after July 15, S&P 500 returns tend to be weaker. In 2024, the market rose in July before selling off vigorously. A soft CPI report fueled hopes for rate cuts. The Nasdaq 100 fell, small caps rose, and hedge funds were forced to unwind carry trades. The S&P lost about 6-7% and did not recover until after the elections. Key Wire Difference: the secret tool that cryptocurrency projects use to secure guaranteed media coverage.

#BTC