Crude Oil Price Diverges from US Dollar Strength

FXOpen

One of the most interesting divergences in financial markets formed recently. The price of oil remains stubbornly elevated, closing the previous week above $75 per one barrel, despite ongoing dollar strength.

Since April 2020, the price of oil has come a long way. It dipped below the zero level for the first time ever, as the futures market settled close to -$40 twelve months ago. But from that moment on, it ripped higher, recovering all the pandemic losses and some more.

Because oil remains a big chunk of energy consumption in the United States and the rest of the world, higher oil prices fuel higher inflation. Higher inflation, on the other hand, pressures central banks to act and raise the interest rates, as most of them have a price stability mandate given by an inflation-targeting framework.

Crude Oil Price Diverges from US Dollar Strength

Commodities vs. Interest Rates

A classic correlation in financial markets tells us that commodities tend to underperform when interest rates are rising. It is not the case this time.

While the interest rates are not off their lows, the Federal Reserve of the United States started to talk hawkish. At its last meeting, the Fed signaled more rate hikes in the near future than the market expected, triggering a move higher in the US dollar.

As such, the EURUSD pair fell from above 1.22 to 1.18, the GBPUSD from 1.42 to 1.38, and the AUDUSD from 0.78 to below 0.75. But the strength in the US dollar did not bring a correction in the price of oil. Just the opposite.

A couple of things may help explain the divergence. On the one hand, the recent Iranian presidential elections have postponed the likelihood for Iranian oil to hit the market anytime soon. On the other hand, the OPEC+ recent meetings failed to commit new supplies for the second half of the year, despite the fact that demand is forecast to rise by 3 million barrels/day in the second half of the year.

Hence, the imbalances in supply and demand point to further upside in the price of oil, despite the Fed’s hawkishness. Many voices in the market suggest that the Fed will signal the tapering of its asset purchases at the upcoming Jackson Hole Symposium in August.

Therefore, until August, the US dollar’s strength will likely persist in expectations of the Fed’s message. Yet, as long as it remains above $70, the price of oil remains bid too, threatening with a move above $80 and beyond.

This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.

Latest from Financial Market News

Weekly Market Wrap With Gary Thomson: NIKKEI-225, USD/JPY, GBP/USD, USD/CAD, Gold Weekly Market Wrap With Gary Thomson: S&P500, USD, SNB, TSLA A Yen For Volatility: US Dollar Surges as Japan Ends 8 Years of Negative Rates Weekly Market Wrap With Gary Thomson: US500, USD, US Inflation, USD/JPY Australian Dollar Volatility Ends in Lull Ahead Of US Data

Latest articles

Weekly Market Wrap With Gary Thomson: NIKKEI-225, USD/JPY, GBP/USD, USD/CAD, Gold
Financial Market News

Weekly Market Wrap With Gary Thomson: NIKKEI-225, USD/JPY, GBP/USD, USD/CAD, Gold

Get the latest scoop on the week's hottest headlines, all in one convenient video. Join Gary Thomson, the COO of  FXOpen UK, as he breaks down the most significant news reports and shares his expert insights.

  • NIKKEI-225 Analysis Indicates Possibility

Forex Analysis

Commodities and European currencies Test Key Supports

On the eve of the Easter holidays, the main currency pairs have slightly slowed down the development of the main trends and are consolidating near key ranges, the breakdown of which could provoke a change in the vectors of medium-term

Shares

Stock Market Analysis: NVDA Losing Leadership?

Since the start of the week, the S&P-500 Index (US500) is up about 0.58% while NVDA's share price is down about 3.8%. This is a worrying sign for Nvidia stock investors — could it be a sign

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 65.68% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.