FX Daily: Risk Assets Rebound as Energy Shock Dominates Markets

• Markets Stage a Reversal:
  After a volatile start to the week, global risk assets rebounded as U.S. President Donald Trump hinted that military operations in the Middle East could end soon, easing some market anxiety.

• Oil Still the Key Driver:
  Although crude prices pulled back slightly, energy markets remain the central risk. Even a 400 million barrel emergency release would cover only about 20 days of lost Middle East production, meaning supply disruptions remain a major concern.

• Strait of Hormuz in Focus:
  A sustainable improvement in market sentiment likely requires the reopening of the Strait of Hormuz and the restoration of regional oil production.

• Dollar Pulls Back from Highs:
  The U.S. Dollar has eased slightly from recent highs, but it may hold firm unless clear signs of a ceasefire or increased energy supply emerge.

• Possible U.S. Policy Responses:
  Washington is reportedly considering several measures to address the energy shock:
  – Waiving oil sanctions
  – Increasing global supply from Russian, Iranian, and Venezuelan crude already at sea
  – Potential intervention in oil futures markets
  – Temporary suspension of federal fuel taxes

EUR: 1.1500 Support Holds

• The 1.1500 level in EUR/USD successfully held during the recent volatility.
  • Options markets show limited demand for downside protection, suggesting traders are not expecting a sharp euro breakdown.
  • Rising European interest rate expectations following the energy shock could provide additional support.

GBP: BoE Repricing Supports Sterling

• UK interest rate expectations have shifted sharply higher after the energy shock.
  • Markets are pricing a stronger response from the Bank of England, as UK inflation already sits near 3%.
  • If this repricing continues, EUR/GBP could move toward the 0.8600–0.8615 support area.

AUD: Resilient Performance

• The Australian Dollar continues to outperform other risk currencies.
  • Key supporting factors include:
  – Australia’s status as a major energy exporter
  – Hawkish stance from the Reserve Bank of Australia
  – Strong Chinese trade data, with imports surprising to the upside.