Oil dictates the rules of the game on Forex

Oil dictates the rules of the game on Forex

•    The US dollar reacts more to oil than to macro statistics.

•    USDJPY's advance to 162-164 is a reason for currency intervention. 

The US dollar continues its victorious march on Forex. The USD bulls are not bothered by the cooling US labour market or the reluctance of inflation to accelerate. In February, consumer prices and core CPI were anchored at 2.4% and 2.5%, respectively. The situation is reminiscent of the end of 2025, when the Fed, concerned about falling employment, cut rates three times. But with one exception, this time, oil prices are poised to return above $100 per barrel.

The closure of the Strait of Hormuz will be costly for the American economy and even more so for the European economy. The EU has warned that Brent settling above $100 per barrel will push inflation up to 3%. GDP growth will slow from the previously expected 1.4% to 1% in 2026. The scenario assumes an increase in gas prices to 75 megawatts per hour, which is significantly lower than the more than 300 megawatts per hour seen in 2022. The European Union does not expect a repeat of the energy crisis. If it is wrong, EURUSD risks falling below parity. 

According to Donald Trump, the sale of 400 million barrels of oil from strategic reserves will significantly reduce prices. However, Brent is steadily rising instead. The US contribution is estimated at 172 million barrels. According to the Department of Energy, this will take about 120 days. We are talking about 1.4 million bpd. The total amount for IEA member countries is unlikely to exceed 3 million bpd. Before the war, about 20 million bpd passed through the Strait of Hormuz. These figures are incomparable and convince investors to buy black gold. 

The Brent rally is becoming the main catalyst for the strengthening of the US dollar. The United States' status as a net exporter of energy commodities makes it more isolated from the conflict in the Middle East than other countries. At the same time, there is an increase in demand for the greenback as the currency for oil-related transactions.

As USDJPY rises, the chance that Japan will step in to support the yen increases. Analysts at National Australia Bank say that in the past, Japan saw 158 to 159 as a warning level. Now they think the new danger level is around 162, where the government and the Bank of Japan may start buying yen.

However, JP Morgan is not so sure. It believes the pair is rising mainly because the US dollar is strong, so Japan may find it hard to justify big intervention. They may wait until USDJPY reaches about 164 before taking action.

By the FxPro Analyst Team