As the conflict in the Middle East developed, investors were terrified that the global economy would face recessions or stagflation due to what the IEA called the largest oil crisis in history. That Donald Trump has no good options, and a 95% reduction in cargo flows through the Strait of Hormuz will drag on almost until May and provoke a rise in Brent to $145 per barrel. However, as often happens, emotions obscure the facts. And reality is not as terrible as it looks at first glance.
Goldman Sachs notes that the story of accelerating inflation as in 2022 may not happen again. Then the price increase was influenced not only by the rise of Brent due to the conflict in Ukraine, but also by the echoes of COVID-19. The Middle East accounts for only 1% of non-energy exports. For comparison, the proportion of China affected by the pandemic was 20%. Unsurprisingly, inflation expectations are in no hurry to rise, looking at the oil rally. It was different four years ago.
Morgan Stanley seems to agree with this, which, despite the rapid growth of Brent prices, adheres to the position that the Fed will lower rates in June and September. Donald Trump is calling on the central bank to do this right now by calling an emergency FOMC meeting. They say every third grader knows that monetary policy needs to be relaxed.
The emotionality of the US president is well known and understandable. But the Fed is likely to choose a middle ground. The Federal Reserve should dissuade financial markets that have stopped expecting a reduction in the federal funds rate in 2026. Updated FOMC forecasts and, probably, dovish rhetoric will be used for this.
The ECB, on the contrary, makes it clear that it will not allow a repeat of the history of 2022. At that time, the European Central Bank spent too long thinking about whether to tighten monetary policy. As a result, he allowed a record increase in consumer prices.
However, there is another story. In 2007-2008, Frankfurt reacted to the doubling of oil prices by raising the rate. However, then it was forced to reduce it by 325 bps due to the inability of the eurozone to bear such a burden of excessively high borrowing costs. It is believed that it was then that the ECB made its biggest mistake.
It looks like the rise in the EURUSD is the result of lower oil prices and expectations of different rhetoric from the Fed and the ECB at upcoming central bank meetings. If Washington appears as a “dove,” then Frankfurt will prefer the plumage of a “hawk.”
