MUFG’s Derek Halpenny notes EUR/USD has returned to pre-conflict levels despite severe Middle East disruptions and higher energy prices, helped by stable equities and only moderate Oil gains. ECB President Lagarde sounded relaxed, with an April hike now less likely but rate increases by June still expected if crude and equities hold, while Euro strength gives policymakers more time but raises near-term caution.

Euro resilience buys ECB time

"President Lagarde yesterday certainly didn’t sound like a central banker who had an objective to steer financial market pricing in a different direction. Pricing for an April hike has been drifting lower and yesterday would have been the ideal occasion to steer market pricing ahead of a black-out period that is approaching (starting next Thursday) ahead of the meeting the following Thursday. So a hike this month does now look less likely but we’d still expect a move by June under circumstances of crude oil prices remaining around current levels or higher and equity markets remaining resilient."

"But we would argue that the ECB governing council currently find themselves with additional time scope due to the resilience of the euro that they may not have expected at the start of this conflict. EUR/USD was over 4% lower seven weeks following the Russia invasion of Ukraine and hence this time is certainly different. Lagarde hinted at that yesterday stating that Europe was not at the epicentre of the Middle East conflict."

"The current situation was described by Lagarde as between the ECB’s baseline and adverse scenarios (severe is the third scenario) and again in that sense the ECB will probably argue it has time before taking action. Just over two 25bp rate hikes remains priced for this year which we would certainly concur with at this juncture. Still, the strength of the euro is in part a reflection of the market’s sense of indifference to Middle East risks that makes us wary over the near-term outlook."

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