ING: The USD - FJElite

A look at how G10 currencies have performed since the Gulf crisis started in early March shows the Australian dollar and Norwegian krone at the top of the pack and the Japanese yen and the Swedish krona at the bottom. The outperformed are net energy exporters, but also have policy rates at 4.00% and above backed by hawkish central banks. The underperformers have seen their terms of trade decline as energy import costs rise, plus have pretty dovish central banks. It looks like investors are preferring currencies backed by central banks prepared to run restrictive monetary policy. In fact, the Reserve Bank of Australia overnight cited the emergence of second- round effects as one of the reasons driving its third hike in this tightening cycle - taking the policy to 4.35%. We also think there is a good chance that Norges Bank hikes this Thursday, which would take the policy rate to 4.25%.

We mention the above for some context on the dollar. Following last week's hawkish FQMC meeting and still elevated energy prices, the market has swung to pricing 6-7bp of Fed tightening this year. So, no longer is it just a question of delayed Fed easing, but whether the Fed will respond to this inflation shock after all with tighter policy. The debate here is where the Fed stands on its dual mandate of maximum employment and price stability, which brings us to the data this week. Here, the focus is very much on the jobs data, with JOLTS data (today), monthly ADP data tomorrow and the April NFP data on Friday. We suspect even a largish decline in NFP this month might not be enough to derail Fed tightening expectations, given the volatility of this jobs data recently and the emerging view that the size of the labour force may be flat right now.

In terms of the prices, the focus today will be on the ISM April services data and whether selling price expectations are picking up. If so - and also given that market-based measures of inflation expectations are on the rise - the Fed is going to be dragged more towards the price stability side of its mandate.

Unless there are clear signs of moves towards sustainable peace in the Gulf - and there is some focus that President Trump wants a deal before his trip to China on 14/15 May - we suspect high oil prices can keep short-dated US rates and the dollar bid. That can see DXY drifting back towards the 99.00/99.50 area this week.