ING and MUFG say Fed expectations kept the US Dollar supported during oil’s retreat, with cheaper energy offering little relief to the Euro.
Oil’s retreat below $100 a barrel earlier this week failed to dislodge the US Dollar, challenging hopes that cheaper energy would cool expectations for further Federal Reserve tightening.
Brent has since rebounded above $105 on Thursday, but its earlier decline exposed how firmly investors were holding on to the prospect of higher US rates.
MUFG described crude heading for a sixth consecutive daily decline on Wednesday morning, while cautioning that the run depended on prices staying lower.
The Dollar was still gaining:
“Momentum remains with the US dollar even with crude oil declining and that’s unlikely to change over the very short-term.”
ING’s Francesco Pesole likewise pointed to central-bank commentary:
“The dollar continues to show very good resilience to lower energy prices and a risk-friendly environment. It’s another sign that the Fed story is dominant, and the hawkish Fedspeak is enough to keep USD in demand.”
Cheaper oil can change both sides of the rate gap
Lower crude can ease inflation pressure, but the currency effect depends on which central bank investors expect to respond most.
ING identifies a risk for the Euro:
“This week underscored another risk: when oil prices fall, markets may price out ECB tightening faster than Fed tightening.”
That would reduce Europe’s relative interest-rate support, even as its energy bill improves.
ING still expects both central banks to hike in December, as outlined in our earlier Euro-Dollar forecast comparison, but sees an October move as more likely from the Fed.
Wednesday’s US composite PMI rose to 58.4 from 56.0, adding evidence of economic strength after the banks published their assessments.
ING also cautions against expecting a modest oil decline to change the policy outlook:
“From a rates perspective, oil floating around the $90-100/bbl range is unlikely to force a dovish rethink in market expectations.”
Our currency coverage draws on live market data, official economic releases and published bank research.
