According to MUFG’s Derek Halpenny, the ECB’s communication and achievement of its price stability goal leave it in a relatively better position than the BoE, but he is sceptical that higher front-end Euro yields will sustain Euro strength. With DXY correlations shifting from yield spreads to Brent, he continues to see EUR/USD downside risks tied to conflict-related Oil dynamics.

ECB stance offsets but cannot erase risks

“Similar to the GBP view, we are not convinced that the jump in front-end yields will continue to support the euro.”

“The DXY correlation with yield spreads has weakened considerably with a correlation with Brent taking over and hence we continue to see EUR/USD downside risks related to the conflict.”

“The yield dynamic may curtail the scale of drop and indeed the yield spread move was quite different in 2022.”

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