ING’s Chris Turner notes that a potential US-Iran peace deal has softened the Dollar, but DXY is still holding firm. He highlights that energy supply losses and inflation risks persist unless Oil flows freely through the Strait of Hormuz. With the Federal Reserve still seen tightening and next week’s FOMC likely supportive, ING does not expect a deep Dollar sell-off.

Dollar holds firm despite peace optimism

"Financial markets reacted with predictable optimism to news that another US-Iran peace deal may be imminent. Many investors are taking their cue from the oil market, where the surprising softness in energy prices over recent weeks has many guessing that oil traders have the inside track on peace negotiations. Who knows for sure, but it does seem that some progress is being made towards a new 60-day deal where the Strait of Hormuz would be opened, and Iran would be able to sell its oil."

"But the legacy issue of this crisis has been the substantial loss of energy supplies and its inflationary shock sent around the world. Unless oil starts shipping freely in the Strait of Hormuz very soon, our house call is that energy markets could move close to a tipping point in July. In turn, we would be wary about expecting much lower oil prices from current levels."

"With the fallout from the oil shock coming at a time of stable to positive US jobs numbers, investors are still wary of how the Fed will react. Short-dated US rates have come lower, but the market still prices 20bp of Fed tightening this year. It is hard to see that being unwound ahead of next Wednesday's FOMC meeting, where a new-look statement and a new set of forecasts could prove dollar supportive."

"DXY has been holding up quite well despite a hawkish ECB and a potential ceasefire in the Gulf. We expect it to find continued support near 99.50."

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