MUFG’s Head of Research Derek Halpenny highlighted the US Dollar has strengthened less than regression models implied given the initial 50% surge in crude, with EUR/USD down only 1.7% after Oil retraced. Halpenny notes that European policymakers, including ECB President Lagarde and Peter Kazimir, signal low tolerance for another energy shock, which may constrain Euro downside relative to the Dollar.

Crude regression and ECB reaction risk

"The US dollar generally has strengthened by less than would have been expected in response to the start of hostilities in the Middle East and the surge in crude oil prices in response."

"The regression analysis we have conducted suggested that a 10% jump in crude oil prices would translate to a 0.7% drop in EUR/USD which based on the 50% surge in crude oil prices would have translated to a 3.5% drop in EUR/USD."

"The speed in which we have retraced from the scale of increase in crude oil prices may explain the more limited dollar move and indeed when we incorporate the retracement in crude oil, the net FX impact is more consistent with our analysis (crude +22%; EUR/USD -1.7% from closing levels on 27th February)."

"ECB President Lagarde yesterday stated that the ECB won’t allow a repeat of the 2022-23 energy price shock although did add that the euro-zone was in a better position to absorb shocks."

"ECB Council member Peter Kazimir today has just stated that a “reaction” from the ECB could be closer than the markets think, adding he didn’t want to “speculate about April or June”."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)