Euro spooked by crisis

Rising oil prices and US Treasury yields have created the perfect environment for the US dollar. According to Fed research, a 10% surge in crude oil prices will push inflation up by 0.15 percentage points next year. The central bank underestimated the impact of the Brent and WTI rally before 2022. As a result, it had to later raise rates aggressively. The futures market has pushed expectations for the new Fed rate cut from June to July, causing the EURUSD to fall.

The rally in Treasury yields is driven by expectations that the Fed will keep rates high and the risks of accelerating inflation, as well as confidence in the strength of the US economy. The US is a net exporter of energy commodities, and its trade balance will benefit from rising oil and gas prices due to the armed conflict in the Middle East. Europe, on the other hand, imports these raw materials. The surge in their cost draws parallels with the energy crisis in 2021-2022, when the EURUSD briefly traded below parity.

Whether or not history repeats itself will depend on developments in the Middle East. A protracted conflict with reduced oil supplies and production in the region will cause Brent to soar to $120 per barrel. The US dollar will strengthen sharply against major world currencies. European currencies, led by the euro, will be the main victims.

The strengthening of the US dollar has led to USDJPY soaring to its highest levels since January. As a result, Japanese Finance Minister Satsuki Katayama was forced to resort to verbal intervention. According to her, the government is monitoring forex movements with a sense of urgency. It will take the necessary measures, working closely and deftly with foreign authorities.

The rise in Treasury bond yields and the US dollar is creating an unfavourable environment for gold. Supported by geopolitics, the precious metal was forced to retreat and is trying to hold on to $5,300 per ounce.