A sharp rise in crude oil prices in the second quarter led to inflation, which in turn led to interest rate hikes in the US and other countries. Higher interest rates meant that the US Dollar strengthened as it attracted investor interest because of potential yields from USD-denominated assets like Treasury securities. As the Federal Reserve’s hawkish monetary policy tightened its grip around inflation, the US entered a technical recession which triggered global recession fears.
The result of this chain of events? The US Dollar is so strong that crude oil is relatively difficult to afford given the exchange rates of various currencies. There’s a current slump in oil prices reflecting a bearish trend as traders rapidly price in a hard recession. Even the sense that the pandemic has subsided – giving businesses a chance to speed up to pre-COVID levels – is dwarfed by the bigger task of tamping down inflation and higher borrowing costs.
Crude oil spot prices are lower at around $77 per barrel at the time of writing, but this is in the context of what could be seen as an inflated US dollar which is much stronger against other major currencies like the EUR or GBP. Nonetheless, the lower crude oil prices could begin to relieve inflationary pressures in the transportation of raw materials and finished products ready to be sent to consumers.
What does this mean for traders? To begin with, the US Dollar’s strength may be undermined by slower or negative growth in the economy, so the third quarter GDP reading on September 29 is an important indicator to watch. Also, the Federal Reserve is expected to keep tightening monetary policy, indirectly supporting the US Dollar’s strength, given the pattern of events so far. Finally, US exports and durable goods orders may feel the pressure of the bubble expanding around the US Dollar.
The August US Durable Goods Orders report is due out later today and is expected to have weakened from minus 0.1 percent to minus 1.1 percent due to higher prices and cautious budgeting as economic headwinds pick up.
Other noteworthy trading events this week include European Central Bank (ECB) chief Christine Lagarde and Fed Chairman Jerome Powell’s speeches tomorrow, September 28. Both central bankers are expected to maintain their hawkish rhetoric which may affect market sentiment depending on the content of their speeches.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
