ING on USD - FJElite
Short-term momentum is swinging back in favour of the dollar as the FX market is finally starting to take the Gulf re-escalation more seriously. Still, both oil (Brent is at $84/bl this morning) and the USD are showing reluctance to fully price back in another supply shock. That's despite the US reimposing a blockade in the Strait of Hormuz and oil inventories at worryingly low levels. Overall US crude inventories (commercial+SPR) were 730.8m barrels as of 3 July, the lowest since 1984.
This positive but contained USD reaction does seem a déjà vu of this spring. But conditions are different now. Reduced Fed guidance after a hawkish shift in June means allowing markets to speculate more aggressively on Fed tightening. Markets are now pricing in a roughly 50% chance of a hike in July, and 43bp by year-end.
Fed speak remains crucial at this stage: yesterday, Chris Waller warned a hike may be needed in the short term if core inflation stays hot. Chair Kevin Warsh starts his first House testimony today, but he may follow his low-guidance approach and give little away. Barr, Goolsbee, Cook and Bowman are all speaking today.
Today's US June CPI release shouldn't severely dent markets' hawkish tendency. Headline should fall month-on-month due to lower energy prices, but core at 0.2% MoM isn't enough to dispel concerns about second-round effects.
Our call for the remainder of the year remains USD negative, primarily resting on another de- escalation and dovish Fed view. But risks, especially in the near-term, are clearly shifting to the bullish side for the greenback, with 102.0 potentially being reached rapidly in DXY if the Hormuz blockade continues.