The weekend brought a few media reports about the US and Iran establishing some communication to discuss the terms of a potential ceasefire, but the tone remains highly confrontational for now. US President Donald Trump gave a 48-hour ultimatum on Saturday for the re-opening of the Strait of Hormuz, threatening to strike Iran’s power facilities. Tehran has so far doubled down on its threats to extend the Hormuz blockage. Oil prices remain well-supported, with Brent still above 110$/bbl and a sell-everything mood in markets affecting equities, bonds and precious metals. This is an ideal environment for the dollar, especially against higher beta currencies.
Alongside developments in the Gulf, we’ll be watching Federal Reserve speakers very closely this week in light of the recent rate repricing and markets interpreting Chair Jerome Powell’s press conference as hawkish. Today, Stephen Miran is scheduled to speak to the media; he voted for a cut again last week, and we doubt markets will put much weight on his words. Speeches by Michael Barr, Lisa Cook, Philip Jefferson and Mary Daly are already scheduled for this week and a few more should be added.
Unlike in the eurozone and UK, markets aren’t pricing in tightening in the US (less than 30% of a hike by year-end), but still sit in clear contradiction with the Fed’s median Dot Plot, which shows a cut in 2026. Developments in the energy market will probably influence upcoming Fedspeak, but based on the Dot Plot there is a chance of some more dovish-leaning remarks relative to market pricing. After all, the Fed has a dual mandate and the already fragile jobs market may be facing a longer-lasting impact than inflation from this war.
Still, oil prices and implications for broader risk sentiment will remain the primary driver for the dollar, with any adjustments in Fed pricing driven by Fedspeak having a smaller and shorter-lived impact. A move below 99.0 in DXY would probably indicate some build-up of optimistic trades on the war in the FX market.
Francesco Pesole
