USD bounce looks small so far – ING

Here are a few initial considerations on the FX reaction to this weekend’s US strikes in Iran, with the caveat that this is a fast-developing situation. First, the dollar bounce looks small so far, especially considering its oversold and undervalued position. This follows the recent script: markets are quick to punish but slow to reward the dollar. For this to change, we think a prolonged period of elevated oil prices is necessary, as that would dent the appetite for oil-averse safe-haven alternatives like EUR and JPY, and in a way force-feed a return to the dollar to investors seeking defensive plays, ING's FX analyst Francesco Pesole notes.

Potential disruptions in the Strait of Hormuz

"Markets seem to be pricing in a modest chance of this happening and treating the escalation in Iran with a good deal of caution. Brent prices jumped above $80/bbl in early trading but have now trimmed gains to just above $78. If indeed this geopolitical risk and oil spike proves to be only temporary, we think markets will rapidly default back to preferring strategic USD shorts on the back of US-generated bearish drivers."

"The determining factor at this stage appears to be Iran’s retaliation against the US strikes here is our commodities team analysis. We have seen scattered reports about potential disruptions in the Strait of Hormuz, which has the potential to send oil prices considerably higher and trigger further unwinding of USD shorts before any de-escalation restores the conditions for rebuilding those positions."

"Data will likely play a secondary role this week. The US calendar’s highlight is Friday’s core PCE figure, which is expected at 0.1% but may still fail to drive rate expectations given the Federal Reserve's stated cautiousness in signalling any dovish shift. We’ll see how Powell defends those views in congressional testimonies tomorrow and Wednesday. Expect also some focus on today’s S&P Global PMIs, which are expected to have slipped back lower in June, and on whether consumer confidence (tomorrow) has moved back above 100.0."