- Expectations of interest rate hikes from the ECB are not helping the economy.
- Iran has the reins of the conflict in the Middle East.
The US dollar closes March with its best monthly performance since September 2022, while the euro ends with its worst quarterly performance since 2024. This divergence has been driven by investor concerns about the global economy. The conflict in the Middle East has exceeded $105 per barrel. The supply shock is raising the risks of a global GDP slowdown and putting pressure on currencies sensitive to falling export demand.
The divergence in monetary policy is not helping the EURUSD. Before the conflict in the Middle East, the chances of a rate cut by the ECB in 2026 were 35%, and those of the Federal Reserve were 96%. However, a month later, the futures market expects three rounds of monetary tightening by the European Central Bank and a 74% chance that the Federal Reserve will keep the federal funds rate at its current level.
Unfortunately, monetary policy operates with a delay and cannot counteract energy shocks in real time. This is the opinion of Jerome Powell. He and his FOMC colleague, New York Fed President John Williams, believe the best path is to keep rates at current levels.
Meanwhile, according to Société Générale, Brent risks rising to $150 per barrel in April, with an average price of $125. A closure of the Bab al-Mandab Strait by the Houthis could drive up prices. Saudi Arabia has managed to bypass the Strait of Hormuz and deliver 6 million BPD through alternative routes. However, new difficulties will automatically force Riyadh to cut production.
Amid rising geopolitical tensions, risks to energy infrastructure and supply routes are raising concerns about a possible rise in oil prices and a broader economic slowdown. The situation remains unstable, leaving policymakers with difficult strategic decisions. Market-based indicators suggest an increasing likelihood of further escalation.
Meanwhile, it is attempting a counteroffensive amid falling U.S. Treasury yields. Treasury yields are falling due to a change in investor sentiment. Whereas stagflation once scared them, markets are now discussing the likelihood of an economic recession in the United States.
He FxPro Analyst team
