EUR/USD: Dollar resumes rally as oil rebounds

The dollar was back on the front foot after a brief pause, with EUR/USD, gold and silver all slipping as bond yields and crude oil both pushed higher. There is not much on the calendar today until the release of the September FOMC meeting minutes. At that meeting, the Fed’s dot plot and Chairman Kevin Warsh’s press conference already tilted hawkish, so the minutes are unlikely to deliver much of a dovish surprise. At the same time, recent US data have been soft. So, the bar for another meaningful leg higher in reaction to the FOMC minutes for the dollar is high. The greenback is more likely to find continued support if oil prices push further higher after yesterday’s impressive recovery from a 3% decline earlier in the day. This means that the EUR/USD forecast remains titled to the downside for now.

 

Keep an eye on oil prices

 

Oil remains the key swing factor. Brent is back above $100 a barrel as concerns over the Strait of Hormuz persist, keeping pressure on bond markets and limiting the scope for a sustained dollar pullback.

 

 

Until something changes drastically, I can’t see oil prices falling back meaningfully any time soon, despite reports that the flows through the Strait have improved in recent weeks. So much oil has been lost that it will take a significant amount of time to return to pre-war levels. Let’s not forget that those depleted global oil inventories will need to be filled and soon. This will keep demand for oil high at the time when supply is restricted. Crude oil, therefore, have to rise to a new equilibrium price soon, if there is no meaningful shift in the supply curve. At the very least, expect oil prices to remain elevated for a while yet and this should keep inflation and stagflation concerns high. While oil flows may have improved, the risk of further disruption has not gone away. With little evidence of an imminent deal, elevated energy prices remain a constraint on any meaningful recovery in bonds and, by extension, on a sustained decline in the dollar. This should keep the EUR/USD forecast tilted to the downside until something changes.

 

Dollar will need to find something new from the FOMC minutes 

 

Tonight’s release of the September FOMC minutes will be watched closely by the FX markets. Investors will be looking for clues on the Fed’s reaction function, particularly what kind of inflation outcome would be enough to justify another rate hike this year. Any discussion around the dovish dissent will also attract attention. 

 

But the minutes may struggle to deliver the dovish surprise some dollar bears are hoping for. Reall that the dot plot showed four policymakers expecting two further hikes this year, compared with just two expecting no additional tightening. 

 

At the same time, the data since the September meeting have been relatively soft and markets already have pushed their expectations to a December hike from October.  That means the bar for the minutes to generate another significant dollar rally is also high. 

 

EUR/USD forecast: France is not out of the woods 

 

French sovereign spreads may have narrowed a bit in recent days, helped mainly by the broader improvement in global bond sentiment, although Marine Le Pen’s pledge to bring France’s budget deficit down sharply to 3.7% of GDP next year also provided some support. But don’t expect that to be the end of it. For indeed, it is too early to call this a meaningful turning point for French assets.

 

Le Pen is clearly trying to position herself as a more market-friendly candidate, but the credibility of the fiscal adjustment remains the sticking point. The proposed €140 billion of savings look ambitious to say the least and it will be seen how it will be delivered.

 

That makes it difficult to see yesterday’s narrowing in spreads as the beginning of a sustained French bond recovery. 

 

Technical EUR/USD forecast and key levels to watch 

 

From a technical analysis point of view, the EUR/USD had broken key weekly support around the 1.1360 area, so the bias remains tilted to the downside. The pair found some support around the 127.2% extension of the last upswing at 1.1220 earlier this week, but the selling has now resumed after the pair was unable to break above 1.1260 short-term resistance.

 

 

The next major downside area on the EURUSD chart I am watching comes in around 1.1085, the 161.8% Fibonacci extension. Below that, the 1.1000 handle could be the next stop.

 

Watch: EUR/USD and gold analysis

 

 

 

Frequently asked questions 

 

Could tonight’s FOMC minutes change the dollar outlook? 

The key is whether the minutes add something new about the Federal Reserve’s reaction to inflation. The hawkish dot plot limits the scope for a dovish surprise, but softer subsequent data also raise the bar for another significant dollar rally. 

Does narrower French debt pricing mark a turning point for the euro? 

I think it is too early to call a sustained recovery. Better global bond sentiment has helped, but the credibility of France’s proposed fiscal adjustment remains the sticking point. 

Are the deeper EUR/USD downside objectives a forecast for today? 

Not necessarily. However, the direction of travel seems to be southbound. So I wouldn’t be surprised if we got there as early as today – especially if oil prices spike.