ING strategists Francesco Pesole, Frantisek Taborsky and Chris Turner note that higher Crude and Gulf tensions are not yet fully priced, leaving short-term upside risks for the US Dollar (USD). They highlight limited Fed guidance, rising odds of further tightening, and a United States (US) Consumer Price Index (CPI) print unlikely to derail hawkish expectations. ING still holds a USD-negative year-end view but sees near-term upside toward US Dollar Index (DXY) 102.0.

Greenback supported by oil and Fed

"Short-term momentum is swinging back in favour of the dollar as the FX market is finally starting to take the Gulf re-escalation more seriously. Still, both oil (Brent is at $84/bl this morning) and the USD are showing reluctance to fully price back in another supply shock."

"That's despite the US reimposing a blockade in the Strait of Hormuz and oil inventories at worryingly low levels. Overall US crude inventories (commercial+SPR) were 730.8m barrels as of 3 July, the lowest since 1984."

"This positive but contained USD reaction does seem a déjà vu of this spring. But conditions are different now. Reduced Fed guidance after a hawkish shift in June means allowing markets to speculate more aggressively on Fed tightening. Markets are now pricing in a roughly 50% chance of a hike in July, and 43bp by year-end."

"Fedspeak remains crucial at this stage: yesterday, Chris Waller warned a hike may be needed in the short term if core inflation stays hot. Chair Kevin Warsh starts his first House testimony today, but he may follow his low-guidance approach and give little away. Barr, Goolsbee, Cook and Bowman are all speaking today."

"Today's US June CPI release shouldn't severely dent markets' hawkish tendency. Headline should fall month-on-month due to lower energy prices, but core at 0.2% MoM isn't enough to dispel concerns about second-round effects."

"Our call for the remainder of the year remains USD negative, primarily resting on another de-escalation and dovish Fed view. But risks, especially in the near-term, are clearly shifting to the bullish side for the greenback, with 102.0 potentially being reached rapidly in DXY if the Hormuz blockade continues."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)