Currencies: Unstable Equilibrium in an Oil-Dominated Regime

The dollar is navigating a transitional environment, caught between an oil-driven inflationary shock and a global economy that - for now - remains resilient. Unlike typical periods of market stress, the greenback is not fully capturing safe-haven flows, suggesting that markets are not yet pricing in a scenario of a global recession.

The primary support for the dollar currently remains the interest rate channel. Rising oil prices are fueling inflation expectations, prompting the Federal Reserve to maintain a cautious stance. Jerome Powell confirmed that monetary policy is sufficiently restrictive to wait for further visibility. Consequently, expectations of rate cuts have been pushed back, while hike scenarios have vanished, establishing a broadly favorable bias for the dollar.

However, this support is already showing signs of exhaustion. The bond market is sending more nuanced signals, with long-term yields ceasing their ascent and entering a stabilization phase. Historically, this type of configuration corresponds to a gradual shift from inflationary risk towards risk of a slowdown. In other words, the market is beginning to price in the possibility that the energy shock could weigh on growth before becoming permanently anchored in inflation.

At the same time, fundamentals remain solid. US consumption is holding up, the labor market remains resilient, and activity indicators remain in expansionary territory. This robustness limits the demand for the dollar as a safe haven and prevents a more pronounced appreciation, despite the geopolitical context.

The key therefore remains external. As long as oil trades around or above $100 a barrel, the dollar retains support via rate expectations. However, any credible de-escalation, accompanied by a sustained retreat in energy prices, could quickly reverse this momentum by reviving rate cut scenarios.

From a technical viewpoint, the EUR/USD did not structure the previously anticipated bearish sequence and instead broke above its resistance at 1.1665. This move validated a bullish reversal pattern in the form of a double bottom, with potential upside toward 1.1910 and an intermediate target at 1.1815. The support level to hold to maintain this bullish scenario is at 1.1585.

Elsewhere, USD/JPY is consolidating sideways between 160.45 and 157.50, while USD/CHF stalled at a symmetry level of 0.8015. USD/NOK remains under pressure as long as 9.85 is not breached, with the risk of a new bearish leg upon a closing break of 9.45.