Catch up with wide moves in rate and growth differentials point to a stronger dollar – ING

The dollar came under pressure on Tuesday on the back of optimism around Russia-Ukraine peace talks. Still, economists at ING suspect there is not much geopolitical risk premium left in the FX market and a re-connection with rate dynamics could mean a rebound in the dollar in the coming weeks.

Soft USD momentum should not last long

“We doubt there is much geopolitical risk premium left in most assets, as markets appear to have taken an optimistic stance well before peace talks have yielded any result.”

“Once the dust has settled, the dollar remains in a position to emerge as an outperformer beyond the very near term, mostly thanks to the Fed accelerating the pace of tightening: we currently expect a 50bp hike in both May and June.”

“We still suspect that the FX market may be increasingly detached from trading the Russia-Ukraine situation and start to catch up with the wide moves in rate and growth differentials, all of which point to a stronger dollar. DXY holding above 98.00 today may be an early sign of this dynamic playing out.”