Euro: De-escalation risk weighs on EUR against US Dollar – Commerzbank

Commerzbank's Thu Lan Nguyen speaks about the EUR/USD exchange rate, citing prospects for de-escalation in the Middle East. She highlights that the US Dollar has risen as rate expectations have shifted in favor of the United States, with European inflation being more sensitive to energy fluctuations. Both the European Central Bank (ECB) and the Federal Reserve (Fed) are anticipated to raise interest rates, but better US-Iran relations and declining energy prices could exert additional downward pressure on EUR/USD.

The US dollar outperformed the euro yesterday, driven primarily by a shift in interest rate expectations, which favored the dollar. This reflects the market's belief that inflation and monetary policy in the euro area are more impacted by energy prices compared to the United States. The forecast is that both the ECB and the Fed will raise rates once more by the end of the year.

However, the critical question is whether both central banks would maintain this course if improved US-Iran relations sparked a significant energy price correction. Market reaction indicates that investors anticipate the ECB to be more cautious than the Fed under such circumstances. Nonetheless, it should not be overlooked that the Fed lagged the ECB in responding to rising inflation pressures.

Should US-Iran relations improve and energy prices drop sharply, EUR/USD might face further depreciation in the near term, albeit whether this trend would prove sustainable remains uncertain.