Dollar forecast: crude oil and yields in sharp focus

• Dollar forecast positive as bond markets implode
• Oil remains primary driver
• DXY could be heading to 100.00

 

Markets have been on a slightly firmer footing in the first half of today’s session, with US and European stock markets pushing higher as crude prices eased back from recent highs. Technology shares also found some stability ahead of earnings from NVIDIA, helping sentiment recover after several volatile sessions. That, in turn, allowed the US dollar to pullback slightly against certain currencies. Still, beneath the calmer surface, the broader macro picture remains far from certain. Diplomatic efforts surrounding the US-Iran conflict continue to make little meaningful progress, and the market is increasingly sceptical that a swift resolution is forthcoming. That matters because oil prices remain elevated and that is keeping inflation and stagflations concerns alive. But there is now a bigger problem: Bond markets are imploding. This something that should keep the US dollar forecast supported and could potentially undermine risk assets late today or week.

 

Elevated oil prices keeping the dollar forecast positive

 

Crude oil prices fell around 3% earlier but don’t be surprised if they bounce back like we have seen consistent during this conflict.

 

The big surge in oil has been a key driver behind the US dollar’s bullish momentum and will continue to remain the case as long as the Strait of Hormuz remains shut. Rising oil has hurt currencies of energy importers, though the downside has until now been relatively contained for the likes of the euro and the pound, owing to hawkish central banks there.

 

But now, the bigger story is arguably not oil itself anymore, but what is happening in sovereign debt markets. Treasury yields continue to climb at a pace that is becoming increasingly difficult for risk assets to absorb. As long as inflation fears remain the dominant driver behind the sell-off in bonds, the dollar is likely to remain supported.

 

It is also noticeable that investors appear far less willing to chase aggressive “de-escalation” trades than they were earlier in the conflict. That should mean limited downside for the dollar and upside for risk assets until there is genuinely constructive geopolitical news from the Gulf region. For now, therefore, the path of least resistance still points towards a firmer US dollar. But could we now see another wave of dollar support emerge from the turmoil in the bond markets?

 

Technical dollar forecast: DXY technical analysis and levels to watch

 

The trend in the dollar index remains firmly bullish. The index is still trading higher on both the week and the month, following last week’s strong rebound from below 98.00 to above 99.00. That move has been driven largely by higher oil prices and rising bond yields, as discussed previously.

 

 

More recently, the index has been consolidating above the 99.00 mark, holding around those levels since markets opened on Monday. Importantly though, every pullback in the dollar continues to attract buyers, and that suggests the path of least resistance still points to the upside.

 

The first resistance level to watch stands at 99.50, with the psychologically important 100.00 mark acting as the next upside target. On the downside, support below 99.00 is seen around 98.50, where the 200-day moving average is beginning to converge.

 

As for the 200-day moving average itself, the longer-term trend measure had largely flattened out in recent weeks. However, the 21-day exponential moving average has now crossed above it, which is typically viewed as a bullish technical signal and points to improving short-term momentum. That shift has already been reflected in the index pushing higher over recent sessions.

 

So long as oil prices remain elevated, and bond yields avoid a sharp reversal from these multi-year — and in some cases multi-decade — highs, the broader bias for the dollar is likely to remain tilted to the upside for the time being.

 

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R