Dollar Faces Resistance Amid Oil Price Swings

The rapid bullish advance of the greenback in the past few days has encountered some selling pressure near the 105 level on the US Dollar Index (DXY). Today, the index is treading water amid a pullback in oil prices following yesterday's OPEC+ decision. It's worth noting that currencies of energy-importing nations entered a downside in response to rising oil prices, as the market factors in slower growth in the respective economies (mainly the EU, the UK, and Japan) due to increased base costs (fuel prices) and potential shift in trade balance towards deficit due to rising import prices. These are two fundamental factors that prompt investors to sell EUR, JPY, and GBP, as they did in the second half of last year during the energy crisis. Near the $90 per barrel level for Brent, prices have encountered some resistance, presuming that this level will stay intact for a while, dollar peers will likely regain ground temporarily as the odds of technical pullback will increase. In this scenario, a temporary correction of the dollar index to the 104-104.50 range seems quite likely:Saudi Arabia and Russia have announced the extension of voluntary oil production cuts by 1.3 million barrels per day for another three months until the end of this year. Prices have surged, but it should be kept in mind that along with rising energy prices, growth forecasts will likely be revised downside. The current consensus suggests that the global economy has already passed its peak in the current business cycle and is now entering a period of moderation or, in the worst case, contraction. Therefore, rising base costs will be seen more as an additional burden rather than an indicator of expansion. Additionally, the fact that the market equilibrium is shifting due to supply side adjustments rather than demand growth underscores the vulnerability of the current oil rally:In contrast, expecting a dollar turnaround in the immediate future is dependent on a dramatic, adverse market reevaluation of the pace of the US economy's development. In this regard, special attention will be given to today's US ISM Services PMI. As usual, the focus will be on the headline reading, as well as price and employment sub-indices. The overall index is expected to nudge down from 52.7 to 52.5 points, which would suggest a slight improvement in overall service sector activity compared to the previous month. However, if the index unexpectedly falls below 50 points, the bullish prospects for the dollar could be in jeopardy.Regarding the European Central Bank's policy, the market is currently pricing in only a 25% probability of a 25 basis point rate hike next week. With the rising oil prices, the probability is likely to be revised upward as the meeting date approaches next week. Nevertheless, speculative positions on the Euro (a noticeable excess of long positions according to CFTC data, which may be liquidated) and the situation in the energy sector make the Euro vulnerable, and the EUR/USD pair could easily fall below the support level around 1.0700, heading towards 1.0650 intermediate support zone.