USD: Conflict-driven support and rate advantage – TD Securities

TD Securities strategists argue that Powell’s hawkish-leaning press conference has supported the US Dollar as markets price out 2026 Fed cuts. They expect the durability of the Middle East conflict and associated tariff and Oil shocks to be the primary driver of the USD, with extended conflict likely to reinforce risk-off dynamics and widen growth and rate differentials.

Conflict duration key for USD path

"Markets took Powell's presser on the hawkish side, pricing out Fed cuts for 2026 and supporting the USD. It is tough for central banks to commit to a path given the heightened uncertainty of the conflict on the back of tariff passthrough to prices."

"We expect the durability of the conflict to remain the primary driver of the broad USD. The longer this extends, we expect more classic risk-off behavior in markets to follow along with further USD strength."

"In terms of global vulnerabilities, the US is relatively shielded from the shock given energy independence and geographical insulation from the ME region. If this continues into the summer, the Fed will likely prioritize the inflation shock, staying on hold, while peers will face simultaneous growth and inflation shocks, pushing growth and rate differentials back in the USD’s favor."

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