US Dollar at Crossroads as Oil Prices and Interest Rates Come into Focus
The US Dollar faces a crucial week ahead as oil prices return to the spotlight.
Last week, the US dollar made its second consecutive weekly gain, putting pressure on the Euro. However, volatility declined significantly with only 19% of notable currency pairs and crosses moving more than 1% in value.
The Middle East oil shock remains a significant concern for markets. Despite hopes that diplomacy might ease tensions, President Trump confirmed he rejected Iran's conditional ceasefire proposal, which included reopening the Strait of Hormuz. This decision increases the risk of further supply disruptions, potentially making available crude more scarce and driving up prices.
The coming week will be crucial in determining the direction of oil prices and their impact on the US dollar. Key data points to watch include the US Core PCE Price Index, US Average Hourly Earnings, US Final GDP, and US Non-Farm Employment Change from the USA, as well as the RBA Cash Rate & Rate Statement from Australia.
The US Dollar index printed a bullish candlestick last week but included an upper wick near the resistance level at 101.39. With increasing market expectations of Fed rate hikes and relatively high US Treasury Yields, there are good reasons to take a bullish bias on the dollar. However, watch out for the resistance level at 101.39.
The EUR/USD currency pair is within sight of an 18-month low below 1.1400. The US Dollar has gained strength and size in recent weeks and has seen a significant bullish breakout. If the US Dollar continues to push this currency pair lower, trend-following funds and institutions may go short.
Soybean futures have been coiling in a bullish consolidation just under their high price, suggesting another breakout is likely. Historically, long-term bullish breakouts in commodities have been profitable trading strategies. It might be wise to control risk by entering with half the normal position size due to the potential for over-extended moves.
The US dollar's performance will depend on various factors, including oil prices and interest rate decisions from major central banks. Traders should remain vigilant and monitor key economic data releases for any signs of market shifts.