USD: Escalation risk supports recovery – ING

ING’s Francesco Pesole notes that the US Dollar (USD) has rebounded as hopes for a swift US‑Iran deal fade, with fresh military incidents in the Strait of Hormuz and a restart of US escorts weighing on risk sentiment. He argues Gulf developments now dominate Fed pricing and Dollar moves, while solid but sector‑concentrated US jobs data are unlikely to shift hawkish expectations materially.

Gulf tensions overshadow US data

"The dollar has risen back as optimism over an imminent US-Iran deal has faded. The US conducted strikes in the Strait of Hormuz area, and Iran fired missiles at some US destroyers after claiming the US violated the ceasefire. The US specified it does not seek escalation, but this is still concerning news for a market that was close to fully pricing in a resolution."

"The WSJ also reported the US is ready to restart military escorts in Hormuz (“Project Freedom”) as early as this week, as Saudi Arabia and Kuwait lifted restrictions on airspace access. That may have prompted Trump to pause the project earlier this week, a development markets had seen as adding pressure on the US to get a deal."

"If this proves to be another episode of misplaced optimism on a US-Iran deal, not only does the dollar have plenty of upside room to recover, but there’s a good chance investors will prove more cautious and won’t jump as aggressively into de-escalation trades without concrete progress in negotiations. The hope for risk bulls is still that China is adding pressure on the US to reach some kind of deal in the Gulf before the 14-15 May Trump-Xi summit. The outlook is looking quite binary from here for the dollar, with the reaction in equities still likely to have a bigger bearing than oil volatility on DXY."

"On the macro side, the US releases jobs figures for April today. Our economists’ call on payrolls is 50k, modestly below the 65k consensus. We expect unemployment to remain unchanged at 4.3%, in line with expectations."

"Ultimately, news from the Gulf remains simply more important for both Fed pricing and the dollar at this stage than jobs figures."

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