Lee Hardman at MUFG observes that both Euro (EUR) and Pound (GBP) have fully reversed their initial Middle East conflict losses versus the US Dollar (USD), helped by falling European energy prices and stronger United Kingdom (UK) Gross Domestic Product (GDP) data. He adds that hawkish Bank of England (BoE) and European Central Bank (ECB) rhetoric has supported EUR and GBP, although a likely delay of ECB tightening to June or July could temper further Euro upside.

Euro and Pound regain conflict losses

"The euro and pound have now fully recovered all of their initial losses against the US dollar since the Middle East conflict."

"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."

"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."

"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."

"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."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)