ING strategists Francesco Pesole, Frantisek Taborsky and Chris Turner note that the Dollar has softened after news of a tentative ceasefire extension between the US and Iran, but remains stronger than in early May. They stress that reopening the Strait of Hormuz is key for a larger Dollar decline, while a hawkish Federal Reserve tone keep tightening expectations alive.

Headline risk keeps Dollar elevated

"The US and Iran have reportedly agreed to a tentative 60-day extension of the ceasefire, which is awaiting US President Donald Trump’s approval. That has offered investors some relief after yesterday morning's fears that new military skirmishes could have led to a broader re-escalation. The question now is whether the Strait of Hormuz will reopen soon or the extended ceasefire will only lead to another prolonged stalemate."

"The dollar fell across the board after yesterday’s headlines, but DXY is still trading a non-trivial 1% above the early-May levels."

"The reasons are again to be found in a hawkish Fed tone and inflation data keeping markets betting on tightening (15bp by year-end) despite lower energy prices."

"Yesterday’s marginally sub-consensus core PCE (0.2% month-on-month) didn’t particularly dent Fed pricing, perhaps suggesting markets want to see the next CPI report before erasing hike bets."

"The dollar remains entirely headline-driven. Strong indications that the Strait of Hormuz has started to reopen for traffic can still send USD materially lower across the board, but equally, a prolonged stall can bring DXY back to 99.50 even without a military re-escalation."

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