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(Bloomberg) — The dollar will come under pressure and follow oil prices down if the Federal Reserve keeps interest rates unchanged on Wednesday, according to ING.
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The Bloomberg’s dollar gauge was trading down less than 0.1% on Wednesday, a fourth session where it was nearly unchanged and seemed immune to recent volatility in oil prices. The 60-day rolling correlation between the Bloomberg Dollar Spot Index and Brent crude oil future prices on Wednesday slipped to its lowest level since late March.
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“That resilience will be tested heavily today,” wrote Francesco Pesole, a strategist at ING. “A Fed hold should trigger an unwinding of precautionary dollar positioning, allowing the dollar to reconnect with the signal from lower oil prices.”
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Traders have grown bullish on the dollar this year, becoming the most upbeat on the US currency since 2015, according to Commodity Futures Trading Commission data. The US attack on Iran disrupted global energy flows and led to a rally in oil prices, sparking global concerns about runaway inflation. Although oil prices have fluctuated with developments in the six-months long war, markets are expecting the Fed to react and are fully pricing in a hike in September.
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The swaps market expects the Fed to leave rates unchanged Wednesday, though it is pricing in a roughly 34% chance of a hike.
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TD Securities has also warned of a dollar drop if the Fed keeps rates unchanged, but said the scale of the decline will depend on the number of FOMC members who vote in favor of holding steady.
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Fed Governor Kevin Warsh, who took helm in May, has stepped back from signaling Fed rate intentions well in advance.
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“In other words, unless Fed Chair Kevin Warsh surprises with a hawkish spin, or we see more than two dissenters, we think the dollar will come under pressure today,” said ING’s Pesole.
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—With assistance from Carter Johnson.
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English (US)