USD: Oil to outshine FOMC - ING

The combination of rising geopolitical risk and oil prices has temporarily re-established some safe-haven appeal for the dollar. Yesterday's USD jump was likely exacerbated by some positioning squeeze, and triggered by another leg higher in oil prices as Israel intensified its strikes on Tehran, and speculation about the US joining the attack flared up. Should such speculation prove correct, the upside risks for oil could increase further, opening up fresh upside room for the dollar, ING's FX analyst Francesco Pesole notes.

FOMC to keep rates on hold

"The extent of FX spillover from the Middle East conflict remains highly connected to the oil price impact. While it's hard to fight the current risk premium on crude, higher prices will need to be backed by evidence of supply disruption. The lack of that would mean that any dollar rebound may prove as temporary as the oil spike. This also adds a new layer of uncertainty for FX, as volatile geopolitically-driven commodity swings are having a greater impact than macro news. The limited impact of yesterday's soft US retail sales is a case in point."

"Domestically, all eyes will be on the Fed today. The FOMC will almost certainly keep rates on hold, and the focus will primarily be on the new dot plot projections. We expect them unchanged at 50bp of easing for year-end, but risks are heavily skewed towards a hawkish revision to just 25bp. We think the latest spike in oil prices may be offsetting recent positive news on inflation, especially as the Fed remains concerned about tariff-led price increases over the coming months. The overall message today should be broadly hawkish in our view, with continued caution on easing plans. That can help the dollar find support even if the bullish push from Middle East events starts to falter."

"Another important macro development today is the release of TIC data for April. We expect that the adjustment in foreign Treasury holdings might not have been too dramatic in April, and at least a couple of months' data after 'Liberation Day' are likely needed to assess the extent of the rotation away from US assets."