Euro: Oil-price sensitivity and war-end effects – Commerzbank

Commerzbank's Michael Pfister explains that lower oil prices may initially curb the Euro's value by dampening expectations for the European Central Bank (ECB) to cut interest rates. However, a lasting resolution to the Iran conflict could bolster the currency through stronger Purchasing Managers Index (PMI) readings and enhanced economic activity.

Throughout recent weeks, Pfister has asserted that the euro might not profit directly from the cessation of the war, should ECB rate expectations decline with falling oil prices. This observation is not unique to the euro, as interest rate expectations for major G10 central banks can be categorized into two groups: those heavily dependent on energy imports and those less so.

Countries that heavily rely on energy imports, such as the European Central Bank, Bank of England, and Swiss National Bank, exhibit a pronounced reaction to fluctuations in oil prices. Conversely, this implies that any easing in oil prices would lead to a reevaluation of these expectations. Consequently, these nations are likely to experience deteriorating economic conditions when oil prices decline, while their interest rate expectations remain relatively insulated from oil price changes.

This inconsistency explains why the inverse relationship—appreciation due to reduced energy dependence in response to falling oil prices—is less pronounced than when oil prices rise.

Furthermore, the economic well-being of net energy importers could benefit from a lasting end to the Iran conflict. Leading indicators, such as the PMI, are likely to respond first to the economic improvements brought by the conflict's conclusion. However, this response is expected to be slower than the reaction observed with interest rate expectations. The article was crafted using an AI tool and subsequently reviewed by a human editor, ensuring accuracy and reliability.