The dollar remains supported by a high interest rate environment, although the markets are gradually shifting away from a narrative that is purely dominated by the energy shock. After several weeks where oil and geopolitical risk dictated all macro flows, investors are slowly returning to economic and monetary fundamentals.
The primary support for the greenback remains the resilience of the US economy. Recent statistics continue to show solid activity despite the oil shock. Non-farm payrolls surprised to the upside with +178,000 jobs, while retail sales grew by +3.7% year-on-year. The manufacturing ISM remains in expansionary territory at 52.7, signaling that the economy is slowing, while not tipping into contraction.
This resilience explains why the Fed maintains a cautious stance. Jerome Powell reiterated that interest rates are now sufficiently restrictive to allow the central bank to “wait and see” the consequences of the Iranian conflict. Expectations for rate hikes have all but vanished, although the market still prices in only a limited likelihood of a rapid cut in Fed Funds. In other words, the Fed remains restrictive, albeit has no intent to further accelerate tightening.
Meanwhile, the bond market, however, is beginning to send a more nuanced signal. US long-term yields have stopped rising, despite oil remaining around $100 per barrel, reflecting a gradual increase in growth concerns. Historically, this type of setup often marks the beginning of a transition: after pricing in inflation, markets begin to integrate the economic cost of the energy shock.
Oil price trends nevertheless remains decisive. Investors do not yet fully believe that the situation in the Middle East will get back to normal soon. Markets are becoming less sensitive to political statements and are now waiting for real and tangible progress on the reopening of the Strait of Hormuz. As long as crude oil prices remain sustainably high, the dollar retains mechanical support via rates and monetary expectations.
However, if energy tensions normalize quickly, the market could rapidly return to a scenario of a moderate slowdown and future monetary easing, which would weigh more heavily on the greenback.
Technically, the EUR/USD remains above its key support at 1.1645, although is struggling to break through its first resistance at 1.1830 to rally towards the target of 1.1910/20. Meanwhile, the DXY also remains above its support at 97.65. Elsewhere, USD/JPY is digesting the key reversal seen in late April through a flat consolidation. The resistance to watch remains unchanged at 158.10 to maintain a negative bias, although only a close below 155.48 will reignite the downside. The USD/CHF is trying to break 0.7775 to open the way to 0.7660. Meanwhile, there is no change for AUD/USD, which remains below 0.7200/15 without clear signs of consolidation to follow. Initial support is located at 0.7100. The Kiwi has broken through and directly rallied to 0.6000, to be viewed in parallel with the 0.7200/15 level on the Aussie.
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