Forex overview. US Dollar Eyes More Upside With Rising Global Risks – ForexNews.PRO
The recent Israeli strike on Iranian nuclear facilities has triggered a surge in oil prices, providing a catalyst for a rebound in the previously undervalued US dollar. The energy price shock generally weakens the euro and provides the Federal Reserve with justification for a cautious approach. We anticipate further short-term decline for EUR/USD.
USD: Geopolitical Tensions Create Opportunity for Dollar Rebound
The dollar has strengthened across the board after Israel’s attack on Iran. The primary driver in FX is the surge in oil prices, up approximately 8% since the strike. Under normal circumstances, the DXY rally would be even more pronounced, fueled by negative sentiment in equities and bonds. However, traditional USD correlations have weakened lately, and the 1.5% drop in S&P 500 futures is likely dampening gains.
The key factor for FX now is the extent and duration of the Middle East conflict’s impact on oil prices. While oil production hasn’t been directly affected yet, markets must factor in a higher risk premium given Iran’s importance in global oil supply. A significant risk is further escalation leading to disruptions in the Strait of Hormuz, potentially affecting Persian Gulf oil flows.
With Israel announcing further strikes and Iran retaliating, the risks point toward a prolonged period of tension. This could alleviate some pressure on the dollar. While the US might use oil reserves to mitigate price spikes, the added risk premium to crude oil increases inflationary pressures.
The soft CPI print had previously triggered an exaggerated negative reaction, and the new geopolitical tensions give the Fed another reason to remain cautious, justifying a correction of the CPI move.
EUR: Impact of Rising Oil Prices
The euro tends to weaken during geopolitical shocks that lead to higher energy prices, diverging from JPY and CHF after the Israeli strike. This is causing an unwinding of stretched EUR/USD long positions. Increased oil market volatility likely reinforces the European Central Bank’s cautious stance on further easing, potentially delaying the final rate cut.
