Crude rules the tape – Oil Grabs the wheel, Fed gets the backseat

Oil is calling the shots across FX markets, relegating the Fed to the passenger seat—at least for now. With crude prices ripping higher on intensifying speculation that the U.S. could soon join Israel in direct military action against Iran, the dollar is flexing its old safe-haven muscles. But let’s be clear: this rally is geopolitical at its core, not macro-driven. The greenback is getting a lift not because Powell is thought to be hawkish, but because traders are war-gaming the Strait of Hormuz and betting on further supply disruption. If the speculation proves accurate, oil’s upside is far from capped, and the dollar could ride that wave for another leg higher.

The problem, of course, is that geopolitics doesn’t follow economic models. The FX spillover from the Middle East hinges on whether crude prices keep climbing—and that, in turn, depends on real supply impacts, not just sabre-rattling. If the shooting stops or the tankers keep flowing, today’s oil spike could turn into tomorrow’s round-trip. Without a critical catalyst, such as pipeline damage or a Hormuz blockade, the dollar’s safe-haven bounce risks being as fleeting as the price spikes driving it.

Meanwhile, the Fed is expected to deliver a classic “hawkish hold.” No change in the Fed Funds rate, but the new dot plot could tighten the screws. There’s little question that 50 bps of cuts are on the chopping block, and 25 bps may become the new base case if Powell chooses to put more weight on tariff-related inflation risks. Rising oil prices don’t help the doves here either—they dilute the recent good news on disinflation and give the hawks more cover to hold the line. A broadly hawkish tone, even without explicit changes to the dots, could lend the dollar some domestic support if the geopolitical narrative stalls.

Adding another wrinkle to the macro picture, TIC data for April drops today. While unlikely to move markets immediately, it’s a key dataset for measuring whether foreign appetite for Treasuries is holding up post–Liberation Day. Early expectations are for modest changes, but it may take several more months of data to fully assess whether global capital is quietly rotating away from U.S. assets amid trade realignment.

In Europe, geopolitics is also distorting standard price action. EUR/USD ignored yesterday’s soft U.S. retail sales and the stronger-than-expected German ZEW survey as crude took the wheel. Structural dollar bears will likely view any EUR/USD dip as a buying opportunity, but the path to 1.16 could be bumpy in the short term, especially if crude oil headlines continue to support the dollar bid.