ING’s Chris Turner notes that higher Oil prices and Gulf tensions have driven a bigger reaction in rates than in FX, with Brent near $80 supporting Fed hawks. The US Dollar (USD) is expected to stay firm versus low-yielders, while carry trades in Emerging Markets (EM) have been unwound. Turner sees US Dollar Index (DXY) around 101.00 with scope back toward 101.50.

Fed scenarios and DXY support

"Dominating global markets yesterday was the seeming breakdown in negotiations between the US and Iran and a more serious exchange of fire. That has extended overnight, with the US military striking infrastructure targets in northern Iraq – the first strike on infrastructure since early April. Brent briefly touched $80/bl and we saw some large moves at the short end of interest curves."

"In addition, last night saw the release of the FOMC minutes for the June meeting. Some had feared that Fed Chair Kevin Warsh's new non-communications strategy would gut these minutes. That was not the case."

"Our key takeaway is that those at the meeting were presented with two scenarios – a delayed cut in rates should inflation dissipate, or a more immediate hike if inflation remains high. Both of those scenarios were seen as equally credible. The dollar and US rates did not move much on the minutes, and it will probably be next week when we get a better steer on the Fed."

"Our bias is that higher energy prices will provide fuel for the Fed hawks and keep the dollar supported on dips – particularly against the low yielders. High-yielding currencies can enjoy better insulation against the stronger dollar given the summer months and investors' tendency to jump into carry trade positions on any sell-off. DXY is trading around 101.00 and we favour it back to the 101.50 area."

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