Oil Eases, Dollars React: What the Strait of Hormuz Reopening Means for Markets

Welcome to the MUFG Global Markets FX Week Ahead podcast with Derek Halpeny, Head of Research, Global Markets, EMEA and International Securities. It's Friday, 17th April, 2026, and joining Derek to pose some questions on the financial market themes for the week ahead is Mathieu Glew, Head of Global Client FX Sales. 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. Hello, Derek.

Hello, Matt. How are you? Very well.

Thank you. Good. Good.

I guess it's difficult to start this podcast today without focusing primarily on the big headline news of the reopening of the Strait of Hormuz. Maybe focusing first on our short term view on the US dollar. Can you tell us a little bit what your views are of the implication of this announcement earlier today?

Yeah, like I think even even just well, when we had the announcement, we were trading around 118, a little bit below 118. So we'd already fully retraced the dollar appreciation that was prompted from the conflict. So as we've been saying in previous weeks, the lack of dollar strength was certainly indicative of optimism about a short lived energy supply crunch, and secondly, an indication of perhaps the still weak underlying fundamentals beyond the issues in relation to the Middle East.

So in answering your question, I would say it's an obvious dollar negative factor. And we've had that initial response. But you know, we also perhaps need to be somewhat cautious at this early stage.

The move already, obviously, I think the markets generally are priced optimistically. I think positioning was certainly skewed more towards some kind of announcement like we've just had. So therefore, the positioning impetus from a reaction to this announcement may not be that significant.

That would be my my first thought. And then obviously, we're going into the weekend. So traffic data in the Strait of Hormuz will be important on Monday.

Trump has just posted on Truth Social that obviously this has been announced by Iran. But he said the U.S. blockade remains in place for Iranian ships until the final components of the deal have been agreed. But he did indicate that was already done, and he expects you would expect potentially something on that over the weekend, which would set the markets up for further positive momentum next week.

So on our kind of base case scenario, we had assumed crude oil prices would remain in the region of 100, 110 through most of this quarter. So the uncertainties would keep energy prices higher. And then the real de-escalation would be in Q3, Q4.

Now, if we get real de-escalation before the end of April, that's certainly one of the implications for our quarterly forecasts going forward, including even in Q2 with euro dollar at 115. That certainly looks like it's too low, obviously. So based purely on this news, if it extends and is real, then obviously we may start to rethink about, you know, pre-conflict, we had a euro dollar forecast at the end of the year of 125.

Then we lowered that to 120. Now maybe do we need to just go back to our original forecast? Possibly, especially given the lack of traction that we've had for the dollar through the conflict, which as I said at the beginning, I think is certainly a reflection of the other factors that have been out of focus, you know, those kind of underlying dollar negative factors that I think could start to come to the fore now again, if we continue to get de-escalation.

Okay. So we could essentially be going back to fundamentals, but my question there is, we've seen the rally in interest rates left and right, and of course, driven by anticipation of higher inflation. If we have this de-escalation and a rapid one, is it going to be sufficient to properly go back to fundamentals or has the damage been done already and inflation expectations have been anchored at a higher level anyway?

Yeah, like I think definitely damage has been done. That's for sure. We've been told a lot about refined fuel shortages and that those are going to hit anyway.

So I think there is going to be a macro impact and inflation is still going to be higher than otherwise would have been the case. So there will be a period of time in which we'll need to assess those implications. But I think if all of that is taking place, you know, shortages, inflation concerns that still linger, if all of that's taking place in the context of traffic flow through the Strait of Hormuz continuing to pick up, then I think, you know, risk sentiment can probably hold up just based on the fact that it's becoming more likely that those elements in terms of fuel shortages and inflation concerns, investors will be more confident of that subsiding as long as the overall picture is improving and the Strait of Hormuz remains open and traffic continues to pick up.

And inflation expectations as well, not as elevated, you know, I think central bankers would certainly argue that long term inflation expectations have remained relatively anchored. So there's that element as well to consider. Okay.

Then again, going back to fundamentals, very quickly also brings in central bank policy and there's quite a bit of noise around that as well. I think we have a Federal Reserve nomination hearing next week. We also have implications for the ECB, for the Bank of England.

What's your stance? What are your views on those different elements, central bank related? Yeah, like again, going back to our assumption in our forecasts with crude staying up at 100, 110 through the rest of this quarter, we had the ECB hiking rates on two occasions with this year and the Bank of England hiking on one occasion.

And yeah, if we're now in de-escalation mode and openly open debate on the Bank of England, there's potentially scope that they would do nothing. Like there's appetite from both of them and both the ECB and the Bank of England in terms of their commons that, you know, they're not going to rush into any decisions. But I think given the fact that the Bank of England's monetary policy stance is already restrictive, they have a bit more scope.

Whereas with the ECB, as you said, with inflation kind of baked in to some degree, I still wouldn't rule out, especially if we get a strong risk rally from here, I certainly wouldn't rule out the potential for the ECB still hiking, but twice would be a stretch. So instead of what we were assuming originally, maybe what transpires is the ECB can maybe hikes once and maybe the Bank of England doesn't do anything. But of course, that's all very different to what's happening in the US.

And this is going back to one of those kind of underlying negative factors for the dollar, the monetary policy dynamic going forward over the next 12 months, based on a dual mandate for the Fed, based on Kevin Warsh, we assume at some point aligned with President Trump, you know, they're going to be cutting quicker. And that kind of divergence with Europe, I think, is going to become more evident and maybe become more of a focus for FX. Okay.

I guess the flip side of that question is on the other side of the pair, do you also see any specific euro positive factors that could be even further accelerating that transition? Yes. Like listeners will know, I've spoken about, you know, de-dollarization and the currencies that could benefit going forward.

De-dollarization has been ongoing for some time, but it's been very orderly. And the euro has not benefited from that. It's been smaller currencies.

But I do think there's the potential for the euro to benefit going forward. You know, the EU bond market is expanding, it's becoming bigger, it's high quality liquid asset pool of capital that's available. And we're going to see more issues on that going forward.

I think also more defense spending will be done on a wider EU scale that will be done via the European Commission and EU bond issuance. So we should see further steady expansion of that market. Therefore liquidity improves.

That should draw in, I think, reserve demand. Interestingly, today we've had this story in relation to Europe easing up on merger and acquisition rules. So antitrust, very focused in terms of the EU Commission, trying to ensure competitiveness and a level playing field across Europe has made inter-EU cross-country mergers and acquisitions very, very difficult.

Therefore you don't get these huge corporates that can compete on a global scale. Basically what they're looking at is watering down those rules to allow for bigger European companies to emerge through easier M&A rules. We don't know the details on what's going to be announced, but it's coming.

And I think certainly that should help in terms of capital inflows and confidence in European corporates going forward. So I think it's definitely a positive development and part of the Mario Draghi recommendations that have been made. So I think all of that is good.

And when you look at flows just at the moment, well, just at the moment in terms of the most recent data available, which is just before the conflicts began, but foreign investor inflows into European equity markets on a three month basis, nearly €250 billion, which is just below the record three months total, which was just after COVID when we had the initial bounce back. So the equity dynamic and flows was actually quite positive going into the conflict. And again, if we revert back to those fundamentals, then Europe to me looks in a relatively good position.

That should mean the Euro benefits. Thank you, Derek. Now, maybe stepping away from the majors and going back to the main event, I suppose.

There's another couple of groups of currencies that we know have been reacted quite heavily to the recent crisis in the Middle East, primarily in my mind, when we've seen high volatility in India, we've been in Korea as well. Of course, there's been significant implications for China as well. Is there anything in particular that you would try to monitor in the coming days for those currencies in particular in Asia?

And also similar question for the more oil correlated currencies like the CAD, the NOKI and so on. Yeah. Like I think in terms of Asia and the currencies that have been most prone to a negative terms of trade shock in relation to energy, Thai Baht, Korean Won, Yen to a degree, INR.

When you look at the performance table of Asian FX through the conflict, it is those that have been most vulnerable that have performed worst. So the terms of trade dynamic is quite evident in Asia FX performance. And we've started to see that retracement trade on optimism.

But if, again, this is confirmed, you could certainly see some scope for those currencies outperforming for a period going forward. We've already had a decent enough bit of retracement. But if this is confirmed, the good news, then there's more potential for that.

And then, of course, in Europe, so just to go back, keeping to emerging markets, obviously the Hungarian foreigns, good news there for sure in terms of Viktor Orban losing the election. And from a Europe perspective, like I just spoke about, I think it's another positive. But from an EM perspective as well, given that favorable backdrop, that's another currency that we think can perform well in the weeks and months ahead.

Fantastic. Let's keep an eye on all that. Thank you very much, Derek.

Thank you. Thank you for listening to this MUFG Global Markets podcast. Rate, review and subscribe.

Contact your MUFG sales rep for more information. Come back next week for more insights from the Global Markets Research Team.