FX Daily: Energy prices will keep dollar supported
The desk posits that the US dollar is likely to remain supported by rising energy prices amidst escalating geopolitical tensions in the Gulf region. Per the full note from ing-think, while the dollar's strength may seem muted in light of recent inflation readings, the persistence of high energy prices, particularly in natural gas and refined products, creates a backdrop that could keep the DXY index buoyant. Current expectations suggest the dollar may engage in a re-rating as market participants prefer energy-exporting currencies, notably the USD, indicating that pairs like USD/JPY could see upward movement as traders anticipate minimal intervention from the Bank of Japan amid a prevailing risk-on sentiment.
What the desk is arguing
The desk emphasizes that the current momentum in energy prices, primarily driven by geopolitical pressures in the Gulf, favors a stronger stance for the dollar. This view is supported by the recent surge in both oil and natural gas prices, which are close to their March highs, feeding through to potential inflationary pressures in global supply chains. Per the full note, the soft June CPI and PPI data may explain why the dollar hasn't rallied more robustly; however, the outlook remains positive for dollar holders.
The present environment reflects a decreased likelihood of selling dollars, as persistent energy price inflation alert the Federal Reserve to maintain a vigilant stance. The note suggests that this could lead USD/JPY towards levels above 162.75/85 in the upcoming sessions, given the current absence of Japanese intervention during market holidays.
Where it sits in our coverage
Our current consensus target for EUR/USD is 1.1700, with a range of 1.1200–1.2000, backed by various institutions: goldman, with a target of 1.1800, mufg at 1.1800, and commerzbank aiming for 1.1900 by March 2026.
This perspective aligns with our consensus, which sits at the median target of 1.1700, while banks like citi forecast a more pessimistic 1.1300, indicating potential divergence in expectations across the board. Importantly, our outlook remains at the upper end of the spectrum, reinforcing a bullish sentiment in this environment.
How other firms see it
Several firms, including goldman and mufg, project a stronger euro, with their targets above 1.1800, contrasting with citi and stanchart, who see potential weakness down to the 1.1400 range. This divergent sentiment underscores the uncertainty in market interpretations of rising energy prices and geopolitical risk's impact on currency positioning.
All eyes should be on USD/JPY performance as it reflects broader market sentiment toward risk, particularly as it looks to breach 162.75. Additionally, the trajectory of EUR/USD parallels broader ECB rate expectations, making it crucial to monitor these levels closely as market dynamics evolve.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Rising energy prices reinforce the dollar's bullish outlook.
- 02Geopolitical tensions in the Gulf significantly support energy markets.
- 03Market participants are favoring USD and NOK amidst energy sector strength.
- 04Current liquidity conditions diminish immediate downside for USD holders.
Market implications
Watch for USD/JPY to potentially break above 162.75/85, signaling renewed strength for the dollar as energy prices remain a focal point. Observing the Fed's responses to ongoing inflationary pressures will also be vital, particularly ahead of any market data releases.
Risks to this view
A significant decline in energy prices or a resurgence in US inflation that prompts a more hawkish Fed stance could undermine the dollar's position. Additionally, any proactive measures by the Bank of Japan to intervene in currency markets could complicate the dollar's trajectory against the yen.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Bank of America | Bullish | 1.1500 |
HSBC | Bearish | 1.1000 |
Scotiabank | Bearish | 1.1200 |
Articles FX Daily: Energy prices will keep dollar supported Published 07:37 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download It is a familiar theme now, but deteriorating news flow from the Gulf is keeping energy prices, short-dated yields and the dollar all relatively well bid. In fact, the dollar should probably be doing better than it is. In a relatively quiet week for data, expect investors to continue favouring energy-exporting currencies, including the dollar Chris Turner , Frantisek Taborsky and Francesco Pesole Higher oil and natural gas prices are bringing continued support to currencies like the dollar and the Norwegian krone USD: Dollar should be stronger Events in the Gulf continue to re-escalate, pushing energy prices meaningfully higher .
We are particularly focused on natural gas prices, which are now very close to their March highs again. And there is increasing focus on refined products, such as diesel, where higher prices can only add to fears of inflationary pressures being handed down global supply chains. It is slightly surprising not to see the dollar a little stronger.
The DXY dollar index is still about 1% off its June highs. This probably owes to last week's soft June US CPI and PPI data, which has taken some of the sting out of the hawkish Federal Reserve story. Markets now only price about 40bp of Fed easing over the next nine months compared to the 55-60bp of tightening priced for the eurozone and the UK.
However, higher energy prices mean that the Fed will have to remain alert, and in this environment we struggle to see that any investors already owning dollars will be inclined to sell. Instead, we can probably see pairs like USD/JPY push a little higher. It looks like Japanese authorities have opted not to intervene during today's Marine Day public holiday, and it would not be a surprise to see USD/JPY briefly break above 162.75/85 over coming sessions on the assumption that the Bank of Japan is a no-show on intervention.
It is a quiet week for US data, and away from the Gulf, the focus will be on big tech earnings again, where Alphabet reports tomorrow. Overall, we expect DXY to continue to find support near 100.50 and push back to the 101.30 area. Chris Turner EUR: Yield spreads give euro a brief reprieve With Brent back above $90/bbl, we would have expected EUR/USD to be trading under 1.14.
However, it may well be the tighter correlation between energy and short-dated euro swap rates that is proving a supportive factor for the euro. Here, as in March, higher energy prices have driven quite a sizeable narrowing in the EUR/USD two-year swap spreads. Two-year EUR swap rates are now trading at a new high for the year, while last week's US inflation data has left short-dated US rates off their highs.
Sources & References
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