MUFG’s Derek Halpenny notes that EUR/USD could benefit from US Dollar weakness and a still-hawkish European Central Bank. Derek Halpenny highlights that LNG prices remain elevated versus pre-conflict levels, keeping Eurozone inflation risks higher. MUFG sees the ECB remaining biased toward further rate hikes as it monitors energy price developments.

LNG prices keep ECB on alert

"The bias will favour further US dollar weakness following the payrolls report but EUR could also be supported by the rates curve maintaining pricing for another hikes as US yields fall back on easing Fed rate hike expectations."

"Inflation risks may have subsided in Europe, but the level of risk remains higher than before the conflict."

"While Brent crude oil has completely reversed the post-conflict surge, LNG prices remain more elevated, at 40% above pre-conflict levels."

"More likely the ECB will be monitoring energy prices and the scale of retracement since the ceasefire extension was agreed and the Strait of Hormuz reopened is not yet enough to eliminate energy-related inflation risks. That will keep the ECB biased toward hiking rates again."

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