How is the energy price shock impacting FX market performance and major central bank policies?
At a Glance
The desk believes that the ongoing energy price shock is reshaping FX market dynamics, particularly affecting the euro and yen while supporting the pound. Per the full note from MUFG EMEA, the eurozone is experiencing stagflationary pressures, which could hinder the ECB's ability to maintain a hawkish stance, while the pound benefits from stronger economic resilience and inflationary pressures. Current consensus targets indicate a cautious approach from central banks, with the ECB and BoE likely to adopt a wait-and-see strategy. The absence of high-impact events in the upcoming calendar suggests that traders should focus on the evolving economic data and central bank communications.
Key Takeaways
Full Analysis
What the desk is arguing
Lee Hardman and Henry Cook argue that the energy price shock is creating divergent FX performance, with European currencies underperforming due to higher import costs. The upcoming BoJ, Fed, BoE, and ECB meetings are critical for determining whether central banks maintain hawkish stances or pivot to accommodative policy.
They particularly examine whether the BoJ and Fed will signal a slower tightening path compared to the BoE and ECB, which face more persistent inflation from energy costs. The implicit rejection is that energy shocks will force all central banks to ease equally, arguing instead for continued differentiation.
Where it sits in our coverage
Our consensus target for EUR/USD is 1.075 with a firm spread of 1.04-1.12, reflecting uncertainty around energy price impacts and policy divergence. This aligns with MUFG's view that European central banks will remain hawkish relative to the Fed and BoJ, supporting EUR/USD in the medium term.
Specific firm targets: - Barclays: Dec-26 target 1.12 - JPMorgan: Dec-26 target 1.10 - BofA: Dec-26 target 1.04 Our view aligns more closely with Barclays and JPMorgan, while BofA's lower target represents a more bearish euro outlook.
How other firms see it
Barclays and JPMorgan are aligned with MUFG's view that European central banks will maintain hawkish guidance. Barclays forecasts EUR/USD at 1.12 by Dec-26, while JPMorgan sees 1.10, both expecting energy price shocks to be temporary.
BofA takes a contrary stance, targeting 1.04 by Dec-26, arguing that energy price shocks will persist and force more aggressive easing from the ECB relative to the Fed. Other contrarians include Goldman Sachs, which expects the BoJ to pivot earlier than anticipated, weakening the yen further.
Market Implications
Continued energy price shocks could sustain EUR/USD weakness in the near term, but hawkish ECB and BoE guidance may support a recovery later. Persistent divergence favors long EUR/USD against a dovish Fed, but risks from escalating energy costs could reverse this.
From the original
Lee Hardman, Senior Currency Analyst, and Henry Cook, Senior Economist, discuss how the FX majors have been performing ahead of the upcoming BoJ, Fed, BoE & ECB policy meetings. Wil the European central banks stick to more hawkish guidance than the BoJ and Fed?
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