USD: Geopolitical risk moves the USD – ING

The escalation in the Middle East has led markets to price in a higher risk of an all-out conflict in the region, which could potentially involve the US. Iran launched missiles at Israel last night, and although most were intercepted ( The US called the attack ‘ineffective’), it has been reported that some targets were hit. Israel has vowed to retaliate against Iran as it continues its ground offensive in parts of Lebanon, notes Francesco Pesole, FX strategist at ING.

Geopolitical events will continue to be the main driver

“Oil rallied on news that Iran was preparing a missile attack yesterday, and stalled overnight around $74-$75 a barrel while awaiting the magnitude of Israel’s retaliation. The situation remains highly volatile, but If Israel’s response is not too aggressive, markets may see both countries preferring to de-escalate for the second time this year after a brief hostile exchange The USD strengthened due to rising geopolitical tensions, with the Canadian Dollar also rising. “

“U.S. domestic developments have been overshadowed by geopolitics. The debate of the vice presidential candidates for the U.S. election did not attract much attention. Meanwhile, the data is generally supporting the recent resilience of the Fed Chair Jerome Powell against a 50 basis point cut. Although the ISM manufacturing PMI was a little softer than expected and prices paid fell below 50.0, the Fed is focused on the labor market. “

“Friday’s payrolls will be the usual binary event for FX, although Powell’s hawkish comments and the market’s dovish valuation (70 basis points of cuts still priced in by year-end) mean the threshold for a payrolls report negative employment for the USD is higher. Today we will look at the ADP employment numbers, which can move the market but rarely have predictive power for payrolls. Geopolitical events should remain the main driver.