ING strategist Francesco Pesole notes the US Dollar (USD) has recovered as United States (US) equities wobble and geopolitical tensions persist. Pesole highlights that higher fuel and airline prices are pushing US Consumer Price Index (CPI) back toward 4%, but the Federal Reserve (Fed) still sees this as a supply shock. Powell’s likely final press conference may lean hawkish, with potential spillovers from big US tech earnings into FX.

Fed stance and equities drive Dollar

"The dollar has recovered some ground over the past 24 hours. While growing nervousness about the lack of progress on a US-Iran deal clearly played a role, it looks to us that it was mostly some jitters in US equities due to AI concerns that allowed the USD to rebound. As discussed yesterday, in many USD pairs, global equities are currently having the highest beta in our short-term models."

"Domestically, the big event is the Federal Reserve’s rate announcement at 19 BST/20 CET. Here is our preview. Higher fuel and airline prices are pushing CPI back toward 4%, but the Fed has so far indicated it views this as a transitory supply shock rather than a demand-driven inflation spiral."

"There is a good chance the Fed will signal it’s still too early to conclude the inflation-growth trade-off and related monetary policy implications. However, the latest signs from the Middle East are not encouraging. While Powell’s signals may be taken with some caution, given that this should be his last press conference, the risks are that he errs on the hawkish side."

"The positive dollar reaction in a hawkish surprise could be exacerbated by a hit to US equities, which will incidentally face a key test today with earnings releases from Alphabet, Microsoft, Amazon and Meta."

"Ultimately, that USD recovery proved rather short-lived, and we suspect month-end flows played a role. Today, we’ll be waiting for any follow-up from Tehran after President Trump claimed that Iran is in a “state of collapse” and wants to reopen the Strait of Hormuz as soon as possible. At the same time, the Wall Street Journal reported that Trump has instructed officials to prepare for an extended blockade of the Strait."

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