Markets Are Adjusting to Something Bigger
This week didn’t give markets anything new to work with.
And in the current circumstances, that is a worry.
Talks between the U.S. and Iran have completely stalled. Meetings have been canceled. Iran is no longer interested in nuclear program talks.
Around that, pressure is building in places that don’t always grab attention straight away. Shipping routes are becoming less predictable. The situation in Ukraine has picked up again, with floods of drones being fired.
Normally, that kind of backdrop would push markets into a clear move.
Instead, things are adjusting underneath the surface. Markets are finding ways to function around the problems in front of them.
That leaves markets in an incredibly strange position.
Nothing has fully broken. But nothing feels fully settled either.
Let’s jump into what that means for the dollar and oil this week.
The Outlook
Markets are adjusting rather than resolving.
Energy is being redirected rather than stabilised. Equity strength is focused into a small group of names. Capital continues to move toward the U.S. when conditions feel uncertain.
That keeps things active, but it also keeps conviction low.
The next moves for the markets could be interesting.
Dollar: Powell’s Swan Song
Next Wednesday, the Federal Reserve is widely expected to leave monetary policy unchanged. The economy continues to grow, but headwinds are intensifying. Transportation fuel costs are pushing inflation higher.
The market expects no change at the 29 April policy decision. Fed funds futures show almost nothing priced for next week. However, the market still leans toward rate cuts later this year. About 10 basis points of easing is priced by December.
The Fed’s own March projections include one 25 basis point cut in 2026. Economists are slightly more aggressive. They predict two cuts in the latter part of the year. I also forecast two rate cuts this year: one in September and one in December.
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Inflation and the Jobs Market
It has been five years since headline or core consumer price inflation was at or below 2%. Higher fuel and airline fares mean CPI looks set to break back above 4% imminently.
The Federal Reserve cannot do anything to ease the current energy supply shock. Its focus is to ensure that inflation expectations remain contained. For now, that seems to be the case. Hence the mildly hawkish rhetoric coming from officials.
Importantly, this supply shock is focused on fuel prices. It is not as broad as the pandemic-related supply chain stresses of 2020 and 2021. We also do not have the same sort of demand impetus that would risk a broader, more persistent inflation story.
Upside Risks for the Dollar
Even though the Fed story is less important for the dollar than events in the Middle East, the FX market will still take note. Part of the market’s enduring demand for risk assets this year has rested on the expectation that the Fed will help with rate cuts and a weaker dollar.
Depending on how tough Powell sounds on inflation, we see some upside risks to the dollar. If Powell echoes recent comments by Christopher Waller – that the longer energy prices stay high, the greater the chance of unchanged policy – then the yield curve could flatten. That would give the dollar a lift across the board.
If that happens, EUR/USD could head down toward 1.15. USD/JPY could see a sustained push above 160.
The Bridge: Why Oil Matters for the Dollar
The dollar’s next move depends not just on Powell, but on oil. Here is why.
Higher oil keeps inflation hot. If the Fed cannot cut rates because energy costs are rising, the dollar stays supported. That is the upside risk I just described.
If oil spikes toward 120,theFedwillstayhawkish.Thedollarwillrally.Ifoilfallsbackbelow90, rate cuts return to the table, and the dollar softens.
Watch the Strait. Watch oil. The dollar follows.
What to Watch Next Week
For the week ahead, expect three things.
First, elevated volatility. Every headline from the US-Iran talks will move the market sharply.
Second, a range-bound trade. Brent will likely oscillate between 102and110. WTI will likely stay between 92and100. The base case is ongoing, tense negotiations without a final resolution.
Third, a high risk of a spike. If talks break down or the US enforces stricter sanctions, oil could quickly test 115–120.
Disclaimer: This article is for informational and educational purposes only. It does not constitute financial advice. Trading forex and commodities carries significant risk. Always do your own research.
