MUFG’s Derek Halpenny notes that the recent retracement in Brent has eased immediate upward pressure on the Dollar, but he doubts the move will last given ongoing Middle East tensions and constrained supply. He highlights that higher Oil prices from current levels appear more likely, and that a deterioration in global growth expectations could see the Dollar extend gains further.

Dollar sensitivity to Brent strengthens

"So it’s hard to be convinced on the prospect of the retracement in crude oil prices lasting and it probably wouldn’t take much to see investor concerns escalate and crude to take another lurch higher."

"With the potential for this optimism to fade again quickly we continue to see scope for the dollar to extend gains further."

"If growth expectations deteriorate, then yield spreads will become less influential and the dollar would likely then extend gains further."

"At this juncture higher oil prices from current levels seems more likely than a further retracement lower."

"The DXY correlation with yield spreads has weakened considerably with a correlation with Brent taking over and hence we continue to see EUR/USD downside risks related to the conflict."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)