Following a decisive victory for Donald Trump, investors have shown renewed confidence in the USD, driven by his "America First" policy, which is expected to prioritize domestic economic growth. This shift has led to a significant rally in the USD across major currency pairs. However, it's crucial to note that the sustainability of this rally could hinge on Trump's approach to escalating geopolitical tensions, particularly in the Middle East. If the administration avoids further conflict, it could help stabilize oil markets and prevent a steep decline in demand.
This week, the Federal Reserve made a noteworthy announcement, signalling that it does not intend to lower interest rates in the near term, contrary to market expectations. The previous anticipation of a rate cut in December has been largely discounted, which has further bolstered the USD. The Fed's stance acts as a buffer against potential downside risks in oil prices, supporting the USD even if oil experiences another downturn.
On November 8 and November 14, the Energy Information Administration (EIA) released data on U.S. crude oil inventories. The reports showed an unexpected increase of 2.1 million barrels for the week ending November 8, significantly higher than the expected 0.4 million barrel build. This marked the second consecutive week of larger-than-expected inventory growth, exerting additional downward pressure on oil prices.
In contrast, the Chinese government opted against implementing a substantial fiscal stimulus, despite the ongoing economic slowdown. Instead, Chinese authorities directed major banks to reduce deposit rates to stimulate liquidity. This decision suggests a reluctance to engage in aggressive monetary easing, even as the country faces mounting pressure from the Trump administration's tariffs. These tariffs could intensify competition among Chinese producers, potentially prompting further calls for economic support from Beijing.
Amid these developments, oil prices fell sharply, hitting $66 per barrel this week. A break below the psychological support level of $65 could trigger a deeper decline, with the potential for prices to reach the $55-$50 range. Such a drop may introduce bearish pressure on the USD, as lower oil prices tend to affect U.S. inflation expectations and broader market sentiment.
- Correlation between DXY and Oil Prices creates trade opportunities.
On November 15, USD/JPY exhibited a strong bearish impulse, reflecting a shift in market dynamics. As a major oil importer, Japan stands to benefit from lower oil prices, which may have contributed to the JPY's strength against the USD. This move could foreshadow similar weakness in the USD against other currencies, presenting potential trading opportunities.
Given the current fundamental outlook and technical price structure, bullish setups may emerge on EUR/USD and GBP/USD, as both pairs have broken key support levels and are now positioned for a corrective rebound on the daily timeframe. This correction could provide favourable entries on lower timeframes.
On the other hand, AUD/USD and NZD/USD are likely to underperform relative to EUR/USD and GBP/USD due to their strong economic ties with China. The slowdown in Chinese economic activity is expected to weigh on both the Australian and New Zealand dollars, limiting their upside potential.
This divergence may create additional trading opportunities in cross pairs like GBP/AUD, GBP/NZD, EUR/AUD, and EUR/NZD, as capital flows favour the relatively stronger European currencies over the weaker commodity-linked currencies.
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Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.