US Dollar: Oil drives Dollar upside risks – ING

ING strategist Francesco Pesole highlights that oil prices are currently the primary short-term driver for the US Dollar, despite a slight cooling of its post-FOMC momentum due to moderating oil prices. The Federal Reserve's hawkish message has given market participants a green light to fully price in a potential October rate hike if data and energy prices suggest it.

Looking ahead, ING notes that the upcoming days are characterized by a typical lull in major US data releases, making oil prices the main market driver into month-end. Aside from oil prices and the Federal Reserve's expectations, Fedspeak will also be closely monitored; however, the dot plot already suggests the Fed plans to hike rates again this year.

Remarks from FOMC members after the meeting could become more relevant after September's data releases. In the FX market, AUD/USD shows a positive bias, trading above 0.7100 as softer US bond yields keep US Dollar bulls on the back foot. Meanwhile, RBA Governor Bullock's comments support rate hike expectations and strengthen the Aussie.

Conversely, USD/JPY is resuming its upside, nearing 158.00, despite the Bank of Japan's expected rate hike and hawkish Governor Ueda's comments, which have weighed on the Yen. Gold continues to climb, hitting new weekly highs, as traders await a sustained move beyond the $4,400 mark. The US Dollar's uptrend is being capped by retreating US Treasury bond yields ahead of Fedspeak and mid-tier US data.

Bitcoin has staged a strong recovery, gaining nearly 33% after hitting a yearly low in July, but remains around 40% below its all-time high, raising questions about whether this marks the start of a new bullish phase or another recovery within a broader bear-market cycle. Japan's ultra-low interest rates have financed trillions in global investments for over a decade, making the Yen one of the cheapest sources of funding.

With the Bank of Japan expected to tighten policy again, that advantage may be entering a new phase.