ING’s Chris Turner notes that deteriorating Gulf headlines and higher energy prices are keeping the Dollar supported, even if US Dollar Index (DXY) remains about 1% below its June peak. Softer United States (US) Consumer Price Index (CPI) and Producer Price Index (PPI) have trimmed the hawkish Federal Reserve narrative, but limited Fed easing is priced. Turner expects USD/JPY to grind higher and DXY to hold near 100.50 before pushing toward 101.30.

Energy shock underpins Dollar resilience

"It is a familiar theme now, but deteriorating news flow from the Gulf is keeping energy prices, short-dated yields and the dollar all relatively well bid."

"It is slightly surprising not to see the dollar a little stronger. The DXY dollar index is still about 1% off its June highs. This probably owes to last week's soft June US CPI and PPI data, which has taken some of the sting out of the hawkish Federal Reserve story."

"Markets now only price about 40bp of Fed easing over the next nine months compared to the 55-60bp of tightening priced for the eurozone and the UK. However, higher energy prices mean that the Fed will have to remain alert, and in this environment we struggle to see that any investors already owning dollars will be inclined to sell."

"Instead, we can probably see pairs like USD/JPY push a little higher. It looks like Japanese authorities have opted not to intervene during today's Marine Day public holiday, and it would not be a surprise to see USD/JPY briefly break above 162.75/85 over coming sessions on the assumption that the Bank of Japan is a no-show on intervention."

"Overall, we expect DXY to continue to find support near 100.50 and push back to the 101.30 area."

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