How is the energy price shock impacting FX market performance and major central bank policies?
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.
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.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Energy price shocks are driving FX divergence, with European currencies under pressure.
- 02European central banks expected to maintain hawkish guidance relative to the Fed and BoJ.
- 03Upcoming BoJ, Fed, BoE, and ECB meetings will be pivotal for policy divergence and FX trends.
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.
Risks to this view
Escalation of energy crisis (e.g., Russia supply cuts) could force ECB/BoE to pause tightening, undermining the hawkish view. BoJ pivot earlier than expected could strengthen yen and complicate FX dynamics.
Welcome to the MUFG Global Markets FX Week Ahead podcast with Lee Hardman, Senior Currency Analyst at MUFG. It's Friday 24th April 2026 and joining Lee to pose some questions on the financial market themes for the week ahead is Henry Cook, Senior Economist. This material is only intended for professional investors in jurisdictions in which its use is permitted under applicable laws, rules and regulations.
It has been produced for information purposes only and should not be construed as investment research or advice. MUFG EMEA disclaimers and disclosures can be located on our website. Hi Henry, thanks again for joining today's podcast.
How are you doing? Yeah, not bad. It's been a busy week, hasn't it?
What have you been watching? Yeah, like I've seen the FX market, we have seen the dollar staging a modest rebound over the past week. That's helped to push your dollar back below the 117 level and the dollar has once again risen back up towards that 160 level.
To us this week, the dollar has benefited from the lack of progress over reaching a lasting peace deal between the US and Iran. And while this carries on, the Strait of Hormuz is still effectively closed and as we continue to highlight, so the longer that the Strait remains closed, the higher the risk of a more disruptive outcome for the global economy, which could eventually create a more supportive backdrop for the dollar going forward. At the same time, we've also seen over the past week more evidence of the negative impact of the energy price shock on the eurozone economy.
The release of the latest PMI surveys from April revealed a more kind of stagflationary backdrop, and that did help to put some further downward pressure on the euro. It'd be interesting to hear your thoughts, Henry, how you think this kind of changing backdrop in Europe is shaping the ECB's thinking ahead of the upcoming policy meeting. Yeah, I think ECB officials have definitely dialed back the sense of urgency.
We don't expect any policy change at the upcoming meeting. I think in terms of messaging, the sort of core guidance is likely to remain unchanged. I think they're going to say they will take a meeting by meeting approach, data dependent.
But there could still be a bit of a hawkish bias. I think they're likely to leave the door open to rate hikes in the future. I think there will be an emphasis on things like vigilance and agility.
But certainly for now, they can afford to wait and get a bit more data, I think. The ceasefire buys them a bit of time. European gas prices are relatively contained.
There's various national fiscal support measures as well, which might kind of limit fuel prices or at least the increases in fuel prices. But yeah, I mean, eurozone headline inflation is at 2.6%. We get some more data next week.
I think it could rise to around 3% in April. So this sort of wait and see approach will become less tenable, I think. We are likely to see further waves of inflationary pressures in the eurozone, regardless of what happens in the Middle East.
And I think it will be hard for the ECB to look past all of that. Lots of the things which are going to be affected, like fuel prices already, but also food prices to come, that's all quite relevant to the health and inflation expectations. You know, at some point, it has to be a judgment call for the ECB.
I think they can't wait that long to see how much path through there is to actual wage growth. And I think they will err on the side of caution here. I kind of continue to expect 50 basis points of ECB tightening this year.
And I kind of think once the threshold has been reached for the initial hike, I think the rhetoric could change back again and we could see a bit more urgency from officials. You know, they could communicate that they're quite keen to keep a lid on things and send a clear message. So, you know, we still see scopes for back to back ECB hikes over the summer.
That's the sort of baseline assumption from our side at the moment. Great. Thanks, Henry.
Turning back to the FX market, definitely over the past week, we would say that the pound has held up better than the euro. And we do think this is reflecting kind of more evidence that the UK economy is growing more and more strongly at the start of this year. And we've also seen as well further evidence that an underlying inflation pressures in the UK still remain uncomfortably high, which we think that combination of factors is leaving kind of less room for the Bank of England to look through this energy price shock.
Obviously, at last month's MPC meeting, we did see an outsized kind of hawkish market reaction. UK yields jumped sharply higher after the meeting. Obviously, since then, the Bank of England has tried to kind of push back against kind of market pricing for more aggressive rate hikes.
It would be interesting, Henry, to hear your own thoughts in terms of what you're expecting from the Bank of England at the upcoming policy meeting. Yeah, I think the sort of backdrop is very similar to that for the ECB. The main difference is the starting point.
UK monetary policy is still in restrictive territory. And the UK also has more recent experience of higher inflation, with government policy essentially driving inflation a bit higher last year, up towards 4%. That's still fresh in people's minds.
And actually, UK inflation is averaged over 5% since 2022. So it's been pretty far from the Bank of England's target. Based on our current energy assumptions, I see inflation in the UK rising slightly above 4% this time, but by the end of the year, there's already clear signs of rising expectations for both businesses and households in the data.
Again, it's going to be some time until there's definitive evidence of the kind of scope of the second round effects on wage growth. My view is just like the ECB, I think the Bank of England might run the side of caution here. No policy change expected next week, but I think it will be hard to get the tone right.
As you said, the messaging in March was a bit clumsy, to put it kindly. And I think this time there will be a focus on uncertainty on the medium term inflation outlook. But it is also plausible that at least some MPC members will vote for a hike led by the chief economist Hugh Pill, or at least kind of signal an intention to do so later on, which could become a bit of a market focus.
In terms of our baseline assumptions and expectations, we've sort of penciled in one hike from the Bank of England later this year. But I am sort of leaning towards more tightening, depending on the messaging next week and what the upcoming data looks like. As you said, the recent activity data, GDP, the PMIs, they've been quite resilient.
The economy is carrying a bit more momentum than we would have expected. And despite some signs of labour markets lack, I think the MPC will kind of lean on the side of caution here and want to stamp out any risk of inflation persistence. Yeah, I mean, looking back at FX performance since the conflict in the Middle East started back in late February, it's pretty clear that the pound has kind of outperformed over that period.
We think that's, like I say, reflecting the bigger adjustment to the upside that we've seen in UK yields compared to in other major economies. And the resilience so far for the UK economy's performance, like obviously we think going forward, that resilience way starts to slip as we move towards the summer, but at least in the near term, that is offering the pound more support. In contrast, though, if we look at currencies which have kind of underperformed during the energy price shock so far, the yen kind of stands out as the kind of clear underperformer.
To us, this is no major surprise. It's very similar to the negative price action that we saw for the yen following the last energy price shock when Russia invaded Ukraine back in 2022. Obviously, this negative terms of trade shock for Japan's economy from higher energy prices is driving the yen weaker.
And then on top of that as well, it definitely looks like the BOJ is going to remain cautious over raising rates further in response to this period of heightened uncertainty. Certainly, the latest media reports that we've seen over the past week have suggested that the BOJ is likely to leave rates on hold at the upcoming policy meeting. So we've decided to push back our own forecast for the timing of the next rate hike from April to June.
We still think, though, that the BOJ will deliver a hawkish hold at the upcoming meeting. We think that they will still signal that they are moving closer to raising rates, which would leave open the door for a rate hike as soon as the following meeting in June. We think that hawkish guidance would be supported as well by a big upward revision to the inflation forecasts from BOJ members as well at the upcoming meeting.
However, I think for the yen, even if we do see hawkish guidance from the BOJ, I don't think that's going to be sufficient to prevent the yen from weakening further. That weaker yen will continue to put pressure on Japan to provide more support for the yen, essentially by backing up verbal intervention with action. See, the need for intervention would increase if we were to see dollar yen break back above the 160 level in the week ahead.
That's it for today's podcast. Thanks again, Henry, for joining us and to all of our listeners. We'll be back again next week and have a good week ahead, everyone.
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