USD: Dollar rebound has been lacklustre - ING

This was always meant to be a very busy week for markets, as a few key central bank meetings - including the Federal Reserve's - were set to refresh the market understanding of policymakers' stance on the inflation-growth balance in the second month of global US protectionism. But as we know, geopolitical developments have stormed into the picture, and the implications of the Middle East crisis for energy markets can easily spill over into central banks' inflation assessments, ING's FX analyst Francesco Pesole notes.

Explorations below 98.0 in DXY may not last very long

"We should therefore start with geopolitics. The larger risk premium in oil prices is justified and disruptions could push Brent prices towards $80/bbl or even $120/bbl if shipping through the Strait of Hormuz is affected. It is now trading just below $75 and should keep showing elevated intraday volatility. The higher oil prices mean central bankers are expected to be more cautious with easing or dovish guidance. The Fed, which is widely expected to keep rates on hold on Wednesday, can now use energy market volatility as an argument to fend off US President Donald Trump's calls for rate cuts while it assesses the depth of the tariff impact on inflation."

"But a more hawkish Fed is not enough to keep the dollar bid in the current environment. The USD bounce since the Israel-Iran strikes started has been relatively contained and is now being largely unwound. That is despite no signs of de-escalation in the region and oil prices staying supported. In our view, that is once again the symptom of the market's distrust in the dollar at the moment, so even a clear-cut dollar positive event like an oil price shock mixed with geopolitical tensions fails to discourage the methodical USD-short building we have observed in the past couple of months every time the dollar was attempting a recovery."

"With Treasury yields deterring rather than encouraging a return to USD in the current environment, we think further dollar rallies should continue to be faded. At the same time, though, the downside risks for USD are probably lower now that geopolitical risks have flared up, and considering how much risk premium is already in the dollar. Explorations below 98.0 in DXY may not last very long unless there are signs of de-escalation. The G7 summit in Canada starts today; expect headlines on trade and geopolitics throughout the next couple of days."