US FX WRAP: Dollar fimer amid Iran threatening a response to the US attacks

USD: The Dollar Index traded firmer, with the tone of trading being dictated by incoming geopolitical headlines. The DXY gapped lower at the open and has been drifting higher through the session, seeing strength after Iran called the US's overnight attacks a violation of the ceasefire, and warned that it would respond and would not hesitate in defending itself. ING said the Greenback may not sell off much on any Middle East de-escalation, as markets begin casting their attention towards the economic fallout, activity and inflation; April PCE data due this week will be key, and comes amid the doves all but vanishing from the FOMC after Miran’s departure, and Waller’s hawkish pivot last week. Other analysts have warned that the annual rate of PCE inflation is likely to rise to the hottest reading since 2022 on Thursday.

EUR: The Euro was an early beneficiary of the USD weakness, further buttressed by hawkish commentary from the ECB’s Schnabel, who said the ECB should lift rates in June, arguing that the size and persistence of the current shock meant “looking through” was no longer an option, even if the Middle East conflict was resolved quickly. The EUR, however, tilted into negative territory amid some geopolitical caution that lent strength to the Buck during periods of the day. Elsewhere, the ECB’s Sleijpen said the central bank is somewhere between baseline and adverse scenario, and it will do everything in its power to tame inflation.

JPY: The yen weakened to above 159.00 vs the USD, briefly topping last week's peak of 159.35, after US attacks on Iran prompted risk-off, resulting in USD upside. BoJ’s Deputy Governor Himino said Iran developments should influence rate-hike timing, and maintaining market confidence requires adjusting monetary easing appropriately as government bond yields rise. Analysts said his remarks are another sign that members are preparing to tighten policy, despite PM Takaichi expressing hopes for a steady policy. Money markets are assigning a probability near 80% for a June rate rise.

NZD: The Kiwi softened ahead of the overnight RBNZ policy announcement. The central bank is expected to hold the OCR at 2.25%, with all 23 economists surveyed by Bloomberg expecting no change. Inflation remains above the RBNZ’s 1–3% target range, and economists have recently highlighted further risks from higher energy prices and a weak economic recovery, which could lead to rate hikes down the line.

HUF: Hungary’s central bank held rates at 6.25%, in line with the consensus view; Governor Varga said that a cut was discussed, but rates were ultimately held in a split decision, as improved inflation and market conditions widened scope for easing. Analysts said the decision and press conference were a strong sign the central bank will lift rates in June, as money markets had expected, but some of the dovish aspects of the announcement (the vote split, and discussion on rate cuts) could open the door to easing later this year.