JPY: Japan steps up verbal intervention as it continues to underperform

VOL SHOCK HAS BEEN RELATIVELY MUTED IN FX MARKET 

Source: Bloomberg, Macrobond & MUFG GMR

https://www.mufgresearch.com/fx/

EUR/GBP: Initial Middle East conflict losses have been fully reversed

The euro and pound have now fully recovered all of their initial losses against the US dollar since the Middle East conflict. EUR/USD was trading just above the 1.1800-level in late February and cable at around 1.3550. The easing of safe haven demand triggered by the outbreak of the conflict has triggered a reversal of US dollar strength which has occurred much more quickly than we had been expecting (click here). The euro and pound have been supported as well by falling energy prices reflecting optimism that risks from energy supply disruption will ease if a lasting peace deal can be reached soon. The price of natural gas in Europe has fallen by around a third from the peak in mid-March. Lower energy prices are helping to ease concerns over the negative impact on growth in the region. There was also some good news this morning from the UK where the latest monthly GDP report for February revealed that economy was growing much more strongly than expected heading into the energy price shock. Monthly GDP can be volatile but expanded strongly by 0.5%M/M in February which was the strongest monthly reading since last April.

At the same time, the euro and pound have derived support recently from hawkish comments from BoE and ECB officials indicating that they are preparing the ground for rate hikes in response to the energy price shock. In contrast, Fed officials have indicated they are more prepared to look through higher inflation in the near-term. However, there has been some back tracking from the both the BoE and ECB suggesting that they want to take more time to assess the fallout from the energy price shock before hiking rates. Bloomberg has now reported that ECB officials are said to be leaning toward an April hold. According to people familiar with the debate, tighter financing conditions are helping to keep inflation expectations anchored for the moment, and a hike wouldn’t necessarily alter market pricing much. We still expect the ECB to deliver 50bps of tightening but the timing of the first hike is likely delayed until June or July which could help dampen the euro’s upward momentum.     

test 1

test 2