Dollar Strengthens Amid Rebounding Oil And Stronger US Data

This morning saw the likes of the EUR/USD and gold extent their falls, while equity markets in Europe also came under a bit of pressure while US futures held steady. A third day of oil price gains on fresh escalation of tensions combined with stronger-than-expected US labour market data has provided fresh support for the dollar. If more evidence of economic resilience emerges this week, the greenback could further extend its gains. The risks to EUR/USD remains titled to the downside for as long as oil prices remain supported. 

Oil extends gains as US-Iran stalemate continues 

This morning saw Treasury yields moved modestly higher as investors prepared for another round of key data releases. The US economic calendar this week is a busy one, with lots of labour market data due for release. Meanwhile, ongoing tensions in the Middle East continued to cloud the broader risk backdrop. Market participants remain uncertain about the prospects for a lasting de-escalation in the Gulf after fresh exchanges between US and Iranian forces overnight raised questions about the durability of the ceasefire arrangement. Oil markets reacted accordingly, with energy prices pushing higher by around 3% by mid-morning London session. That, in turn, push bond yields higher on both firmer growth expectations because of US data strength and lingering inflation concerns due to the oil shock. 

US data and oil keep the greenback supported

The recent advance for the dollar remains largely driven by oil prices. In addition, we have seen a run of firmer-than-expected US economic releases and a growing debate over whether the Federal Reserve may need to tighten policy again before year-end. Tuesday’s JOLTS report added to that story, showing job openings rising to their highest level since May 2024.

So far, the US labour market has remained more resilient than many had anticipated. That sits uneasily alongside concerns over stretched household finances and suggests the economy may be regaining momentum rather than slowing.

Today’s focus shifts to the ADP employment report, where economists expect payroll growth of around 120,000, followed by the ISM services survey. Both releases will be scrutinised for signs of labour market strength and pricing pressures. Any indication that inflationary forces remain embedded could reinforce expectations that the Fed’s next move could indeed be a hike. 

EUR/USD key levels to watch

At the same time, several energy-importing countries across the world have seen their currencies continue to remain under pressure as higher oil prices erode external balances. The likes of the euro and yen come to mind. The EUR/USD was looking heavy as it tested support near the 1.1600 handle.  

Markets are now fully aligned behind the expectation that the European Central Bank will raise rates by 25 basis points at their June meeting amid mounting energy-related risks. This is helping to limit the downside but in the event of a major escalation we could see the single currency break below the 1.1600 handle and head down towards 1.1500.

Yesterday, the EUR/USD slipped following the release of stronger US labour data, and recovery in oil prices. Another round of encouraging US releases could see the pair retest recent lows near 1.1575 initially, before potentially breaking towards 1.1500. 

In a nutshell

While ECB pricing is helping to limit the downside, external risks mean the risks remain skewed to the downside. Much depends on developments between the US and Iran. Should oil prices continue pushing higher, this will create further headwind for the euro against the dollar.