The dollar is lagging behind oil

The dollar is lagging behind oil

•    The lagging nature of the USD index rally compared to Brent is linked to US policy.

•    USDJPY bulls pay less attention to verbal interventions.

Brent saw a sharp rally amid renewed threats from Donald Trump, but EURUSD stabilised after a decline amid expectations for the US employment report. Bloomberg experts forecast a return to growth in non-farm payrolls in March following one of the sharpest declines in February. Unemployment is expected to remain at 4.4%.

Stabilisation of the labour market will allow the Fed to focus on consumer prices. According to John Williams, President of the New York Fed, the risks to employment and inflation are balanced, allowing rates to be kept at current levels. A strengthening labour market will allow the FOMC to begin discussing a rate hike, which is good news for the dollar.

Strong oil prices are helping the dollar rise, but it is clearly lagging behind the rally in Brent and WTI. One reason is the high premiums for political uncertainty in the US, which are undermining confidence in the US currency and government bonds.

Another factor holding back the bears on EURUSD is the still-lingering hope for a swift end to the conflict in the Middle East. Investors fear missing out on a post-war rally, similar to the surge in the S&P 500 and other risky assets following Liberation Day. If these illusions fade and markets come to believe that the war will drag on for months, the US dollar will strengthen further against major global currencies.

This includes the yen, which has developed immunity to verbal interventions. Finance Minister Satsuki Katayama noted that Donald Trump’s remarks had a significant impact on financial markets. Speculative volatility is rising in both the forex market and oil futures. Her department is ready to take action on all fronts. To officials' disappointment, such rhetoric has not halted the rise of USDJPY.

By the FxPro Analyst Team