The euro has rebounded slightly from Friday’s 7.5-month low of 1.1411, potentially ending a four-day losing streak. The euro remains caught between rising oil prices—which hurt the eurozone’s growth outlook while lifting inflation due to its reliance on imported energy—and markets rapidly pricing in possible ECB tightening. Traders now see a strong chance of a 25 bp rate hike by mid-year, especially if oil stays elevated, while ECB officials have adopted a more hawkish tone in their messaging. However, many economists still expect the deposit rate to remain around 2% for years, arguing the oil shock may be temporary and insufficient to justify tighter policy. As a result, EURUSD’s direction will likely hinge on whether the ECB ultimately validates market expectations with a rate hike or instead prioritizes growth risks and holds policy steady.

The yen is holding near a 1.5-year low against the dollar despite warnings from Japan’s finance minister that authorities are closely monitoring the currency and may intervene if needed. The dollar has strengthened on safe-haven demand amid rising Middle East tensions and higher oil prices, while stronger U.S. inflation data has reduced expectations for near-term Fed rate cuts. USDJPY is hovering around the mid-159s, close to its highest levels since 2024, as Japan’s dependence on energy imports makes it particularly sensitive to the oil surge. With the Bank of Japan meeting this week, policymakers face a difficult balance: staying dovish risks further yen weakness, while turning hawkish could push already rising government bond yields higher.

The Australian dollar is regaining momentum as markets widely expect the RBA to deliver a second consecutive rate hike to 4.10%. Rising energy prices linked to Iran tensions are likely to push Australian inflation back above 4% in Q2, increasing pressure on the RBA to maintain a tightening bias and making its forward guidance on inflation risks and policy outlook especially important. For the AUD, the mix of a more hawkish RBA and a global risk-off environment creates conflicting forces—rate expectations and a tight labor market offer support, while geopolitical tensions boost the USD and weigh on risk-sensitive currencies.