The Dollar Has Drawn Closer to Oil, and It Paid the Price

The only factor currently determining the fate of various assets is oil prices. The most rapid drop in Brent since 2020, triggered by news of negotiations between the U.S. and Iran, lifted stock indices and crushed U.S. dollar quotes. The 30-day correlation between the greenback and black gold has reached its highest levels since Donald Trump announced maximum tariffs reminiscent of the 1930s in April of last year.

Several reasons account for this close relationship. The United States is the largest oil producer and, in general, its currency benefits from rising Brent and WTI prices. Supply issues with black gold have heightened demand for American grades. Additionally, oil is priced in U.S. dollars. Combine that with the dollar's status as a safe-haven asset and the economy's greater resilience to crises in the Persian Gulf than those in European or Asian economies.

It is clear that, having lost these advantages, the USD index has sharply declined. Mutual accusations between the U.S. and Iran of violating the ceasefire with enemy actions, as well as Israel's attack on Hezbollah in Lebanon, which Iran opposed, have not helped. Negotiations are expected to begin at the end of the week, but until then, the situation in the region remains tense. Donald Trump stated that he does not intend to withdraw U.S. troops until a deal is reached.

Against this backdrop, the sharply increased risk of a reversal in the U.S. dollar, which rose from January to March, has declined. Nevertheless, they still remain at levels significantly higher than those at the beginning of the year.

For the EUR/USD rally to continue, further declines in oil prices are required, which seems problematic under current conditions. A rapid full opening of the Strait of Hormuz is not anticipated. This will require at least several weeks. Restoring the damaged energy infrastructure in the Middle East will take even longer. As a result, a drop in Brent to the levels of $65-70 per barrel that existed before the armed conflict will be postponed until the end of the year.

Given the existing correlation, this suggests the rally in EUR/USD to levels above 1.20 seen at the end of January will take longer than buyers would like. Even an agreement between the U.S. and Iran will not spare the Eurozone economy from the woes associated with high inflation and energy prices. In such conditions, the main currency pair is more likely to be sold on the rise rather than bought on the dip.

From a technical standpoint, the daily chart for EUR/USD is still realizing a 1-2-3 reversal pattern. As long as the quotes remain above the upper boundary of the fair value range at 1.1465-1.1620, the "bulls" are in control. Conversely, the inability of buyers to storm the pivot levels of 1.1730 and 1.1760 will be a sign of their weakness and a reason to form short positions in euros against the U.S. dollar.