USD Outlook: Crude oil slide, Fed signals raise downside risks

• USD and crude oil tracking closely again
• Fed speakers hint at July rate cut
• DXY rejected at resistance with bearish signals
• Core PCE and Fed remarks key into weekend

USD Summary

Crude oil has quietly become a major driver of USD sentiment again, with the correlation between front-month WTI futures and the dollar index tightening notably in recent weeks. As oil prices plunge and Fed officials signal a potential July cut, the stage may be set for further dollar downside. With the DXY rejected at a key technical level and momentum turning bearish, traders should keep one eye on energy markets and the other on this week’s PCE data and Fed commentary for guidance.

Crude Moves Key for USD?

The U.S. dollar and crude oil futures have essentially been tied at the hip for large periods over the past fortnight, as seen in the chart below examining the rolling 12-hourly correlation between the U.S. dollar index (DXY) and front-month WTI crude oil futures.

Source: TradingView

Where crude went, the dollar often followed, briefly reinstating the latter’s standing as a haven currency. It benefitted from being an energy superpower, leaving the United States far less vulnerable to supply shocks than other nations heavily reliant on fossil fuels to power their economies.

While some may see that as pure narrative to some, the key difference between this period of market turbulence and those of the recent past was the abrupt surge in energy prices. That means if we’re entering a renewed environment of lower energy prices—as recent market moves suggest—it may be the spark to set off a new wave of U.S. dollar weakness, especially when some Fed officials are signalling that rates could be cut as soon as next month.

DXY Prints Bearish Reversal Signal

Source: TradingView

Bolstering that view, the price action on the daily chart would be troubling for U.S. dollar bulls, with Monday’s key bearish reversal candle warning of the risk of renewed downside ahead. DXY traded up to resistance at 99.40 and was comprehensively rejected, failing again to even test the 50-day moving average, mirroring the last four occasions it approached it.

With RSI (14) breaking its uptrend while remaining beneath 50, and with MACD curling back towards the signal line beneath zero, the momentum picture is again turning in favour of the bears. A retest of support at 97.74 may soon be on the cards. If it were to buckle, there’s little technical support for DXY until 94.66, making the price action in the coming days potentially important for the dollar’s longer-term trajectory.

Fed Dovish Pivot Underway?

While the crude oil price comes across as a key determinant of the dollar’s near-term performance, traders should also pay close attention to remarks from Fed officials before and after the release of the core PCE deflator—the Fed’s preferred underlying inflation gauge—on Friday. Governor Michelle Bowman joined Christopher Waller on Monday in conditionally endorsing a rate cut in July should inflation measures remain tame, hinting a broader dovish pivot may be underway.

Based on the inputs received in separate CPI and PPI reports earlier this month, it’s likely another tame core PCE result will be seen for May, potentially opening the door for other FOMC members to join the dovish shift. Right now, the implied probability of a 25 basis point rate cut from the Fed in July is only 20%, although two full cuts are expected by year-end with the first deemed highly likely by September.

Source: Bloomberg

While Jerome Powell’s two-day testimony on Capitol Hill will steal the headlines on Tuesday and Wednesday, having already heard from him at length last week following the June FOMC meeting, other committee members may be the ones to watch—barring an abrupt and unlikely change in tone from Powell. Williams, Collins, Barr, Schmidt and Cook are the names to watch given they are all voters on the FOMC this year, especially Williams as the influential New York Fed President.

Source: TradingView (U.S. EDT)