Oil Slicks and Rate Tricks: FX Caught in the Crossfire.
Oil vs. FOMC: Geopolitical risk and oil prices are driving USD gains, outweighing weak US data.
Dollar’s rally conditional: Sustained gains depend on actual oil supply disruptions—not just headlines.
Hawkish Fed risk: FOMC may reduce its projected 2024 rate cuts, boosting USD support.
Euro under pressure: Structural bearishness on USD still supports buying EUR/USD dips, but upside is limited.
BoE in a bind: UK inflation is softening, likely prompting a dovish tone that weakens GBP.
USD: Oil Takes Centre Stage, FOMC a Supporting Act
Rising geopolitical tension and a surge in oil prices have temporarily revived the dollar’s safe-haven appeal. The greenback’s rally yesterday appeared fueled by a positioning squeeze and renewed fears that the US could escalate military involvement alongside Israel, pushing oil prices higher. If those fears materialize, the dollar could benefit further from the oil-led momentum.
Currency markets are currently taking cues more from energy markets than economic data. However, if the oil rally isn’t backed by actual supply disruptions, its impact—and the dollar’s rise—may be short-lived. This adds uncertainty to FX markets, as geopolitically driven swings in commodities now overshadow macro indicators. A good example: yesterday’s weak US retail sales barely moved the needle.
All eyes now turn to the Fed. The FOMC is expected to keep rates steady, but the updated dot plot will be key. Our base case is for 50bp of cuts by year-end to remain in place, but there’s a real risk of a more hawkish outlook—just 25bp or even none. Oil’s rise may outweigh recent soft inflation data, and tariff-related concerns remain. That should keep the Fed’s tone cautiously hawkish, offering the dollar some support even if geopolitical risk fades.
TIC data is also out today. While no major surprises are expected, more data post-‘Liberation Day’ will be needed to truly gauge global demand for US assets.
EUR: Dips May Be Bought, But Headroom Is Limited
Geopolitical instability is distorting EUR/USD’s usual macro-driven movements. Strong German ZEW sentiment and soft US data would typically support the euro—but markets are prioritizing oil headlines over fundamentals right now. Although EUR/USD looks stretched and could pull back, many traders still see dips as buying opportunities due to underlying bearish sentiment toward the dollar.
Even with a dollar rebound, we doubt EUR/USD will fall back into the 1.12–1.13 range for long. Our near-term view still targets 1.14.
It’s a quiet data day in the eurozone, though several ECB officials are scheduled to speak. With oil volatility influencing inflation expectations, we expect the Governing Council to adopt a more cautious tone. That likely means the first rate cut stays penciled in for December.
Meanwhile, in Sweden, the Riksbank is widely expected to cut rates by 25bp today. Oil volatility could tempt a hold, but a surprise seems unlikely given market pricing. Any dovish action could be tempered by hawkish forward guidance, limiting SEK downside. The krona’s muted reaction to geopolitical headlines underscores its emerging role as a relative safe-haven within Europe.
GBP: Soft Inflation Data Undermines BoE Hawks
UK inflation data for May just dropped: headline CPI eased slightly less than expected to 3.4%, core matched forecasts at 3.5%, but services CPI—watched closely by the BoE—came in a touch softer at 4.7%.
This continues a trend of disappointing UK data, following recent soft prints in employment and GDP. While a rate cut remains unlikely at tomorrow’s BoE meeting, today’s numbers open the door to a more dovish tone.
For now, the pound has little support. Geopolitical stress usually hits GBP harder than EUR, and the UK data backdrop has turned decisively negative. Unless the BoE delivers a surprise hawkish signal tomorrow, a move in EUR/GBP toward 0.860 looks increasingly likely.