The war bid has taken grip of several markets at the same time and the FX market is no different. At bottom of this chart you can see the correlation coefficient between the DXY basket and oil futures, which is currently showing at a 0.87 reading implying a strong direct correlation between the two markets. While this can wax and wane the fact that it's been growing tighter and tighter over the past two weeks makes sense, and as oil prices remain bid the US Dollar is testing a breakout at a pretty significant level.
Perhaps more important is the 'why' behind that relationship, as it's easy to assume USD strength on the back of safe haven bids which is driven by the fear of ramifications around higher oil prices.
But realistically I think this is more a matter of oil-vulnerable economies getting hit harder as higher oil prices can have an even more profound effect on growth and inflation, putting central banks in Europe or Japan in the difficult spot of having to deal with higher levels of inflation even without a boost in growth. As such, even increasing odds for rate hikes in Europe have been unable to turn around the sell-off in EUR/USD.
But at this point I think we can take that relationship and draw some deductions: As in, President Trump wants to see stock prices higher and oil prices lower - will he have some headlines ahead of the weekend designed to tilt the narrative in a more-friendly direction? And, if so, the impact on the USD could be a pullback or weakness after this current test of a breakout.
On that front, as you can see daily RSI on the DXY basket is nearing overbought territory and this is something that hasn't happened since January of last year, before the currency reversed. And even if bulls are able to stage a breakout at current levels - will that overbought backdrop be viable enough for a continued break beyond an even more contentious level at the 100-100.22 area in DXY? That was support in Q3 of 2024 and then came into cap the highs on three separate occasions last year, culminating in a double top formation in November that led to a strong sell-off that lasted through the 2026 open. - js
Perhaps more important is the 'why' behind that relationship, as it's easy to assume USD strength on the back of safe haven bids which is driven by the fear of ramifications around higher oil prices.
But realistically I think this is more a matter of oil-vulnerable economies getting hit harder as higher oil prices can have an even more profound effect on growth and inflation, putting central banks in Europe or Japan in the difficult spot of having to deal with higher levels of inflation even without a boost in growth. As such, even increasing odds for rate hikes in Europe have been unable to turn around the sell-off in EUR/USD.
But at this point I think we can take that relationship and draw some deductions: As in, President Trump wants to see stock prices higher and oil prices lower - will he have some headlines ahead of the weekend designed to tilt the narrative in a more-friendly direction? And, if so, the impact on the USD could be a pullback or weakness after this current test of a breakout.
On that front, as you can see daily RSI on the DXY basket is nearing overbought territory and this is something that hasn't happened since January of last year, before the currency reversed. And even if bulls are able to stage a breakout at current levels - will that overbought backdrop be viable enough for a continued break beyond an even more contentious level at the 100-100.22 area in DXY? That was support in Q3 of 2024 and then came into cap the highs on three separate occasions last year, culminating in a double top formation in November that led to a strong sell-off that lasted through the 2026 open. - js
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