Geopolitical risk moves USD – ING

Escalation in the Middle East has caused markets to price in a higher risk of a full-fledged conflict in the region that could involve the US. Iran fired missiles at Israel last night, and while most were intercepted (the US called the attack “ineffective”), some targets were hit. Israel has pledged to retaliate against Iran as it continues its ground offensive in parts of Lebanon, notes Francesco Pesole, FX strategist at ING.

Geopolitical events are set to remain the main driver

“Petro rallied on news that Iran was preparing a missile attack yesterday and locked around $74-75 a barrel overnight as it awaited 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 for the second time this year to de-escalate after a brief hostile exchange. The USD strengthened amid rising geopolitical tensions, and the Canadian dollar also bounced back.”

“Domestic developments in the US have been overshadowed by geopolitics. The debate of the vice presidential candidate for the US election did not attract much attention. Meanwhile, the data largely supports Fed Chairman Jerome Powell’s recent pushback against a 50 basis point cut. While ISM manufacturing was slightly weaker 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 dovish comments and bearish market pricing (another 70bp of price cuts by the end of the year) mean the bar for a negative jobs report in USD is higher. Today, we’ll look at the ADP jobs numbers, which can move the market but rarely have predictive power for wages. Geopolitical events should remain the main driver.”