Recently, the rebound of the Australian dollar and the euro has been quite fierce, especially with the AUD/USD soaring to 0.7148 at one point, and the EUR/USD fluctuating around 1.18, even touching 1.1811 yesterday. The main driver behind this rally is the news of the US-Iran restart negotiations boosting risk appetite, with Trump indicating that he might negotiate with Iran again within the next two days, which has heightened market expectations for easing tensions.

From the perspective of risk aversion fading, crude oil prices have fallen sharply, and the support for the US dollar is indeed weakening. Strategists at Westpac Bank are optimistic about the Australian dollar, believing that due to its yield and economic outlook, AUD/USD could rise to 0.75 in the second half of this year. The probability of the Reserve Bank of Australia raising interest rates for the third time in May is also at 68%.

However, will the euro keep falling? Different institutions have varying views on this. Societe Generale is more optimistic, suggesting that if the Strait of Hormuz reopens, EUR/USD could surge to 1.20. But ING has poured cold water on that idea, believing that the short-term gains of the euro are limited, and only substantial progress in US-Iran negotiations could sustain a break above 1.18, with the ECB’s rate hike expectations possibly being too aggressive.

Mitsubishi UFJ strategist Lee Hardman warns that the market might be overly optimistic now, as the risks of energy price shocks are underestimated, which could harm the global economy. Therefore, the sustainability of the euro’s rebound remains uncertain, and one should not focus solely on this recent rally.