Stronger US Dollar, Lower Key Risks to S&P 500 in Week Ahead

Crude Oil Fundamental Forecast: Neutral

  • WTI crude oil prices fell last week despite Ukraine woes, demand bets
  • A rise in the US dollar and another decline in the S&P 500 played against energies
  • All eyes are on weaker US GDP and the Fed’s favorite inflation gauge

WTI crude oil prices weakened slightly last week despite continued uncertainties about the impact of Russia’s attack on Ukraine and a global economy that continues to open up in the post-pandemic world. The sentiment-linked commodity likely came under pressure from a combination of a rising US dollar and deteriorating risk appetite. The S&P 500 fell about 2.75% last week.

Last week, Fed Chairman Jerome Powell rate increases of 50 basis points at the start of the period, to the point that the markets were increasingly expecting 3 consecutive meetings of such deliveries. Not to mention that quantitative tightening is also fast approaching. In fact, using a 4-week moving average to smooth out the weekly percentage change in the Fed balance sheet and S&P 500the former entered contraction territory while the latter posted the worst monthly performance since early February.

Rising expectations for a rate hike and risk aversion propelled the US dollar higher last week. The price of oil is mainly fixed in the latter on the world markets. When the greenback appreciates, it can sometimes push the commodity down. With that in mind, all eyes are on key US economic data over the coming week. These include early estimates of Q1 GDP and the central bank’s preferred inflation gauge.

The world’s largest economy is expected to grow just 1.1% q/q, down from nearly 7% in the fourth. That would be the slowest pace of acceleration since the immediate aftermath of the 2020 global pandemic. Before that, you’d have to go back to late 2018 to see similar growth rates. Meanwhile, the core PCE deflator is expected to decline to 5.3% YoY in March from 5.4% previously.

Could the latter imply a spike in inflation? That remains to be seen, but the data would likely cement a 50 basis point rally next month. It should be noted that oil price volatility has declined – see the data on the chart below. Yet a 4-week moving average of the ATR (Average True Range) remains just around levels in the wake of the 2020 Covid outbreak. With this in mind, the threat of further risk aversion and a stronger greenback could continue to offset the supply and demand issues that are supporting crude oil prices.

WTI Crude Oil Price Dynamics – Weekly Chart

Chart created in the trading view

— Written by Daniel Dubrovsky, Strategist for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

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