FX Daily: Dollar shrugs off oil sell-off
The desk sees the dollar's recent strength as underpinned by solid fundamentals, particularly the outlook from the Federal Reserve, despite a significant drop in oil prices. Per the full note from ing-think, tomorrow's FOMC is outlined as a pivotal point for FX markets, potentially laying the groundwork for a shift in monetary policy. Data trends show a resilience in the dollar, reversing nearly all weekend losses and reflecting a pivot away from energy prices toward central bank dynamics. This strengthens the case for dollar resilience, especially as tightening expectations gain traction from economic data rather than solely energy pricing.
What the desk is arguing
The desk frames this as a key moment for the dollar as it continues to rally, exhibiting strong fundamental backing despite lower oil prices. The focus has shifted from crude markets back to the actions and signals from central banks, especially in light of the upcoming FOMC meeting.
Recent performance indicates that almost all losses from the weekend have been reversed, suggesting a growing confidence in dollar strength. The expectation of rate hikes from the Fed, supported by strong economic data, is becoming the primary driver for dollar valuation.
Where it sits in our coverage
The current consensus for EUR/USD is 1.1700 with a range of 1.1200 to 1.2000. Specific targets from notable firms include: - danskebank: Dec-26 target of 1.1200 - hsbc: Dec-26 target of 1.1800 - mufg: Dec-26 target of 1.2400
The desk's bullish sentiment towards the dollar and the focus on the Fed's upcoming decision aligns with broader market expectations, although our targets are generally positioned at a higher level compared to some firms like danskebank and uob, whose targets indicate more caution.
How other firms see it
Firms such as hsbc and mufg show alignment with the desk's optimistic stance on the dollar’s trajectory, bolstered by expectations of continued Fed tightening. Conversely, firms like danskebank hold a less aggressive view, reflecting caution around dollar strength.
This evolving dollar narrative may also feed into the broader dynamics seen in USD/JPY, where changes in Fed policy could significantly impact JPY valuations in the near term.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Dollar demonstrates strength despite declining oil prices.
- 02FOMC meeting expected to influence future dollar direction.
- 03Market sentiment shifting focus from energy prices to central bank policies.
Market implications
Traders should monitor the dollar's reaction around the FOMC meeting, particularly if hawkish signals from the Fed emerge. Key levels to watch on EUR/USD include 1.1700, which could act as a critical line of support.
Risks to this view
A reversal in the dollar's strength could occur if the FOMC signals unexpected dovishness or if macroeconomic indicators suggest a slowdown that undermines Fed tightening expectations. Additionally, geopolitical developments, particularly concerning the US-Iran situation, could introduce volatility.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
BNP Paribas | Bearish | 1.1500 |
UBS | Bullish | 1.1800 |
UOB | Bullish | 1.1800 |
Articles FX Daily: Dollar shrugs off oil sell-off 07:49 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The dollar is rallying again, displaying strong fundamental backing (data, Fed) despite sharply lower oil prices. Tomorrow’s FOMC is looking more and more like a key crossroads for FX. Elsewhere, the Bank of Japan hiked rates, but will probably still struggle to keep JPY afloat.
In Australia, the RBA’s hawkish hold didn’t convince markets Francesco Pesole , Chris Turner and Frantisek Taborsky We have published our monthly update of FX views and forecasts: FX Talking: Dollar downturn delayed USD: Fed story dominates over oil The first 36 hours of trading after the US-Iran deal point to a structurally stronger dollar than a few weeks ago. Nearly all weekend losses have already been reversed despite a sharp drop in oil, signalling that FX markets are shifting focus away from crude and back to central banks. Tightening expectations are increasingly driven by data and central bank communication rather than energy prices, unlike at the start of the Middle East war.
This puts tomorrow’s FOMC firmly in focus for FX. The dollar can stay resilient, but needs a nod from policymakers (especially from new Chair Kevin Warsh) that rate hikes are a real possibility. Australia is an example of the higher bar for hawkish communication set by markets: the RBA governor tried to deliver a hawkish hold this morning, explicitly saying inflation is still too high and rate hikes remain a possibility.
But markets seem more focused on the softer growth story and short-term swap rates have come under pressure along with AUD. Today, market sentiment will probably be swayed by any new details about the US-Iran Memorandum of Understanding, still unpublished ahead of Friday’s signing in Switzerland. President Trump has sounded very optimistic that the Strait of Hormuz will reopen by Friday, but European leaders at the G20 meeting have flagged concerns about the timing, in particular due to de-mining operations.
This keeps questions around the durability of the oil sell-off open, and FX markets are, for now, reluctant to fully price in that optimism. Francesco Pesole EUR: Very unstable floor EUR/USD is back to Friday’s levels. As discussed above, we see this as another clear signal that markets are focused on the central bank story much more than oil prices.
The two-year EUR:USD swap rate differential has retained a widening bias since the weekend, and keeps hovering around the pre-war 110-115bp area. The crucial difference back then was, however, that Europe had a relatively attractive growth story, and the Fed an easing bias. Fed moves tend to have greater implications for EUR/USD than the ECB’s due to the knock-on effect on global sentiment, and when adding the severely damaged eurozone growth, it’s understandable markets aren’t jumping on bullish bets on the pair just yet.
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