Recent events in Eastern Europe have made traders look at the prospects of global financial markets from a different angle. Total uncertainty, coupled with unprecedented and expansive sanctions against Russia, caused panic, which drove investors away from risky assets and triggered demand for safe-haven instruments. Against this backdrop, the U.S. dollar index (DXY) surged to its mid-2020 highs, approaching the 98.00 resistance level.
Market participants are trying to figure out how growing geopolitical tensions will affect the Federal Reserve's tightening plans. Even though the current uncertainty reduces the likelihood of a 50 basis point rate hike at the next meeting, the U.S. regulator is still likely to raise it by 25 basis points at least four times this year. The prospect of an early monetary policy tightening in the U.S. remains one of the main drivers for the dollar, especially given that the decision could be made in the next two weeks.
It is worth noting that U.S. inflationary pressure keeps rising exponentially. In January, the core personal consumption expenditures price index climbed from 4.9% to 5.2%, the highest since 1982. At the same time, consumer spending rose 3.1%, well above the expected 1.5%. Traders seriously assume that economic sanctions against Russia could harm the entire global economy and cause serious disruptions in the supply of raw materials and finished goods, even more, severe than during the peak of the Delta coronavirus outbreak. In this scenario, U.S. inflation risks updating its highest in more than 50 years and exceeding 9%.
Growing oil prices also threaten to accelerate already-surging inflation in the U.S. This week, WTI crude oil has hit its highest levels since 2013, approaching $110 per barrel. Even the IEA's decision to release 60 million barrels of oil from their strategic reserves to mitigate the deficit could not limit the rally in oil prices. Analysts at Goldmman Sachs noted that the IEA release represented a "one-month offset to a potential disruption to one-third of Russia's 6 million barrel per day (BPD) seaborne oil export flows". Thus, oil prices will keep rising, spurring inflation and forcing the Fed to raise its rates aggressively. As a result, the dollar will strengthen even further.
What's more, the U.S. economy, which is expected to expand by 3.5% this year, with unemployment at around 4% and inflation hitting a 40-year high, could well withstand much higher interest rates. That being said, the dollar rally is just getting started. We recommend buying DXY with a target of 100.00 points or higher.