Dollar rebounds as shale 'isolates' US but Fed outlook clouds gains

Matthew Ryan, CFA Ebury

The shale revolution, which ended the US dependence on energy imports and turned it into a net exporter, has isolated the country from the worst consequences of the energy spike. This is reflected in a general rebound of the dollar against every major peer. We continue to favour upside in the USD so long as the war rages on with no clear end in sight. A crumb on comfort is that Trump does, at least, appear to be seeking a relatively quick “off-ramp” to the war. Whether he is able to orchestrate a controlled de-escalation in a manner that he can reasonably pass off as a “win” remains to be seen.

The main drag on the dollar in these times is the relative dovishness of the Federal Reserve, which seems more reluctant than its G10 peers to react to the energy price spike with hikes. Rather than bracing for higher US rates, futures markets are now merely expecting the FOMC to remain on hold for the rest of the year. This outlook will be tested by the critical labour data out this week, which is expected to be relatively unaffected by the war and could push more FOMC members towards hikes.

Author

Matthew Ryan, CFA

Ebury

Matthew is Global Head of Market Strategy at FX specialist Ebury, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.

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