The dollar is entering a more directional phase, although it remains contingent on one key factor: oil. After several weeks of extreme tension linked to the Iranian conflict, the market is beginning to shift from a purely inflationary regime towards a more balanced one, where the risk of a slowdown is gradually being priced back in.
Initially, the oil shock supported the greenback. Rising energy prices fueled inflationary expectations, forcing the Federal Reserve to maintain a restrictive stance. Expectations for rate cuts were pushed back, which mechanically bolstered the dollar through interest rate differentials.
However, this support is eroding. The bond market is starting to stabilize, or even anticipate an economic slowdown, should the energy shock persist. Historically, this phase often corresponds to an inflection point: after pricing in inflation, markets begin to integrate the economic cost of the shock.
At the same time, macroeconomic data remains solid. Consumption is resisting, employment is resilient and business indicators remain generally upbeat. This resilience limits the demand for the dollar as a safe-haven asset and prevents a more pronounced appreciation.
Another key element is the credibility of the geopolitical narrative. Markets are becoming less and less sensitive to political announcements and are now demanding concrete evidence of de-escalation. This shift reduces erratic dollar movements and strengthens its anchoring in fundamentals.
The determining variable therefore remains unchanged: the trajectory of oil. Sustainably remaining above $100 would prolong the dollar’s bullish trend via rates. Conversely, a rapid normalization of the energy market would revive rate-cut expectations and weigh on the greenback.
Technically, EUR/USD rallied and stalled at its first target of 1.1815. The trend remains positive – although as long as 1.1645 holds firm, with an upside target maintained at 1.1910. In parallel, we will monitor 99.15 on the dollar index to maintain the negative trend towards 96.85/70.
Elsewhere, USD/JPY is treading water at between 160.45 and 157.50. The Aussie returned to test its YTD highs of around 0.7200, without managing to break through, carrying the risk of an intermediary pullback towards 0.7035 or even 0.6915. The Kiwi, however, remains the weakest vehicle after stalling at 0.5930, signaling a new bearish leg towards 0.5679.
