EUR/USD: Conflict keeps downside risks in play – MUFG

According to MUFG’s Derek Halpenny, the ECB’s communication and achievement of its price stability goal leave it in a relatively better position than the BoE, but he is sceptical that higher front-end Euro yields will sustain Euro strength. With DXY correlations shifting from yield spreads to Brent, he continues to see EUR/USD downside risks tied to conflict-related Oil dynamics.

ECB stance offsets but cannot erase risks

"Similar to the GBP view, we are not convinced that the jump in front-end yields will continue to support the euro."

"The DXY correlation with yield spreads has weakened considerably with a correlation with Brent taking over and hence we continue to see EUR/USD downside risks related to the conflict."

"The yield dynamic may curtail the scale of drop and indeed the yield spread move was quite different in 2022."

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