The developing appetite for risk and divergences in monetary policy are supporting the euro. The Bank of Japan did not signal any interest rate hikes in April. The US dollar continues to lose ground amid decreased demand for safe-haven assets due to easing tensions in the Middle East conflict, contributing to a rise in global risk appetite. Investors are anticipating the imminent resumption of negotiations between the US and Iran, linked to the US administration’s shift from military pressure to economic measures, including the closure of the Strait of Hormuz.
A prolonged blockade could lead to an unfavorable scenario according to the IMF’s forecasts. In this scenario, oil prices could remain above $100 per barrel for an extended period, contributing to a slowdown of global GDP to 2.6% and an increase in inflation to 5.4%. The baseline forecast anticipates that economic growth in 2026 will be 3.1%, which is 0.2 percentage points lower than previous expectations.
The International Monetary Fund believes that the eurozone will suffer more than the US. The economy of the currency block relies on energy imports, and a rise in oil prices to $125 per barrel could put significant pressure on it.
Nevertheless, the euro has a positive correlation with the appetite for risk, and bulls have capitalized on a strong rally in US stock markets, which have returned to record highs. At the same time, the increasing correlation between the volatility index VIX and the US dollar is applying pressure on the greenback.
MUFG Research points out that a 40% rally in Brent oil prices since the onset of the Middle East conflict should have led to a 3% decline in EURUSD. The euro’s return to pre-war levels is attributed to rising global risk appetite and divergences in monetary policy. Market expectations indicate a 35% probability of an interest rate cut from the Federal Reserve in 2026, while investors are confident in two rate hikes from the ECB and assess a 30% probability of a third hike.
Other major currencies have benefited from the weakening dollar. However, the yen is not in a hurry to strengthen, as statements from Bank of Japan Governor Kazuo Ueda have raised concerns among bears in the USDJPY pair. Ueda noted that the bank will closely monitor developments in the Middle East and did not provide any signals of tightening monetary policy. This creates a dovish impression, as similar statements have preceded policy tightening in the past. As a result, the futures market has reduced the odds of tightening in April from 55% to 32%.
