EUR: Middle East turmoil overshadows ECB factor
The euro isn’t as exposed as higher-beta currencies to a potential escalation in the Middle East, although extending the dollar considerations above, substantially higher energy prices could lead to a more structural bearish stance on EUR/USD. While we have been highlighting how a much stronger terms of trade and economic-fundamental position of the euro compared to 2022 hardly points to EUR/USD parity at this stage, it is possible that markets price in a deterioration in economic conditions in the eurozone as a consequence of higher geopolitical risk.
When it comes to how the ECB decisions might feed into the FX impact, we can identify two main scenarios. If the Middle East situation spirals into a fully-fledged conflict, and there is a major correction in equities and big commodities rally, then a potential delay in ECB easing plans would hardly do much to support the euro. Remember how in 2022 the ECB was delivering large rate hikes, but the euro remained under pressure. In a second scenario, where geopolitical events fail to generate a major equity and commodity shock, then the ECB decision on whether to go ahead with rate cuts would have a much bigger say on EUR/USD direction.
While markets monitor closely how the situation evolves in the Middle East, the downside risks for EUR/USD have undoubtedly risen overnight, and the 1.0600 support may not hold for much longer.
When it comes to how the ECB decisions might feed into the FX impact, we can identify two main scenarios. If the Middle East situation spirals into a fully-fledged conflict, and there is a major correction in equities and big commodities rally, then a potential delay in ECB easing plans would hardly do much to support the euro. Remember how in 2022 the ECB was delivering large rate hikes, but the euro remained under pressure. In a second scenario, where geopolitical events fail to generate a major equity and commodity shock, then the ECB decision on whether to go ahead with rate cuts would have a much bigger say on EUR/USD direction.
While markets monitor closely how the situation evolves in the Middle East, the downside risks for EUR/USD have undoubtedly risen overnight, and the 1.0600 support may not hold for much longer.
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