- Global risk appetite and monetary policy divergence are driving EURUSD gains.
- The Bank of Japan gave no signs of a rate hike in April.
It continues to retreat amid falling demand for safe haven assets as the easing of conflict in the Middle East has increased global risk appetite. Investors are confident that peace talks between the United States and Iran will resume soon. Contributing to this is the White House's shift from a military strategy to economic influence through a blockade of the Strait of Hormuz.
A prolonged blockade could lead to the IMF's adverse scenario. In this scenario, oil prices would remain above $100 per barrel for an extended period, global GDP would slow to 2.6%, and inflation would rise to 5.4%. In the base scenario, economic growth in 2026 will be 3.1%, 0.2 percentage points less than the previous forecast. The International Monetary Fund believes that the eurozone will suffer more than the United States. The shared currency bloc depends on energy imports.
However, the euro has a positive correlation with risk appetite, and its bulls have capitalized on the strong rally in US indices, pushing them towards all-time highs. At the same time, the increasing correlation between the dollar and the US dollar is putting pressure on the dollar.
MUFG Research notes that the 40% rally since the start of the Middle East war should have led to a 3% decline in . The firm attributes the euro's return to pre-war levels to growing global risk appetite and divergence in monetary policy. The futures market is pricing in a 35% chance of a Fed rate cut in 2026. Investors are banking on two ECB rate hikes and a 30% chance of a third.
Other global currencies have benefited from the weakness of the US dollar. However, the yen is in no rush to rally as Kazuo Ueda's comments rattled USDJPY bears. The BoJ Governor stated that the Bank would continue to monitor the development of the situation in the Middle East and gave no signs of a tightening of monetary policy. This is a moderate tone, since he has already given similar signals before. As a result, the futures market has reduced the probability of a monetary tightening in April from 55% to 32%.
He FxPro Analyst team
