ING’s Chris Turner notes that the US Dollar (USD) is benefiting from a hawkish Federal Reserve (Fed) narrative as markets price in a small amount of additional tightening for 2026. He highlights that high Oil prices and Gulf tensions are keeping short-dated US rates supported. Turner argues that the Fed’s focus is shifting toward price stability, which could see US Dollar Index (DXY) edge back toward 99.00–99.50.

Fed tilt keeps Dollar supported

"We mention the above for some context on the dollar. Following last week's hawkish FOMC meeting and still elevated energy prices, the market has swung to pricing 6-7bp of Fed tightening this year. So, no longer is it just a question of delayed Fed easing, but whether the Fed will respond to this inflation shock after all with tighter policy."

"Here, the focus is very much on the jobs data, with JOLTS data (today), monthly ADP data tomorrow and the April NFP [Nonfarm Payrolls] data on Friday. We suspect even a largish decline in NFP this month might not be enough to derail Fed tightening expectations, given the volatility of this jobs data recently and the emerging view that the size of the labour force may be flat right now."

"In terms of the prices, the focus today will be on the ISM April services data and whether selling price expectations are picking up. If so – and also given that market-based measures of inflation expectations are on the rise – the Fed is going to be dragged more towards the price stability side of its mandate."

"Unless there are clear signs of moves towards sustainable peace in the Gulf – and there is some focus that President Trump wants a deal before his trip to China on 14/15 May – we suspect high oil prices can keep short-dated US rates and the dollar bid. That can see DXY drifting back towards the 99.00/99.50 area this week."

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