US Dollar: Back-end yields support USD consolidation – ING

ING strategists Francesco Pesole and Frantisek Taborsky note that rising back-end yields and risk-off sentiment are helping consolidate recent Dollar gains, even if they look stretched versus short-term fundamentals. They highlight resilient Oil prices, scepticism over US-Iran talks, and increased Federal Reserve hike pricing, suggesting the USD rally may persist with Brent potentially reaching $110/bbl before month-end.

Dollar rally tied to bonds and oil

"The global bond sell-off continues to leave its mark on FX. The dollar is benefiting from the knock-on effect on global risk sentiment, allowing a consolidation of recent gains even as they start to look stretched relative to short-term fundamentals. Oil prices remain bid after the UN summit failed to generate tangible optimism about a resolution in the Gulf."

"Reports that the US and Iran are discussing a phased deal to reopen the Strait of Hormuz prompted a correction in oil, but losses were fully recouped within a couple of hours, underlining growing scepticism about any imminent de-escalation. It is a dynamic that argues against any material rebound in bonds for now."

"By extension, we remain cautious about calling the end of this USD rally. We may see $110/bbl for Brent before the end of the month, with the dollar finding fresh support from the energy story, especially in an environment where the Fed's hawkish remarks are allowing markets to price in more rate hikes. A testament to that is the 2-year SOFR, which is up almost 20bp over the past 48 hours."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)