How Does War in Iran Impact ECB Expectations?
Euro On Watch
EURUSD continues to stabilise today after the market rebounded from Tuesday’s lows amidst a cooling in USD. The outbreak of war with Iran has had significant implications for FX markets largely due to the spike higher in USD. However, if that initial rally proves to be a kneejerk reaction and USD reverts lower, EURUSD could be poised to push higher near-term. As with the Fed in the US, a surge higher in energy prices is creating fears of a fresh inflationary cycle in the eurozone, pushing back against any ECB easing expectations near-term.
Morgan Stanley: Hawkish ECB Shift
Indeed, Morgan Stanley has this week issued a note signalling that it no longer sees any ECB easing this year at all as a result of the war in Iran and its impact on energy prices. In the note, analysts from the bank warn that inflation is likely to remain above the ECB’s target for the rest of the year, negating the need for any further easing. The bank previously projected two cuts from the bank this year, though this call has now been pushed out into 2027 as a result of the conflict and the risk that energy prices push much higher this year.
Iran Risks
Indeed, if the conflict should persist for longer than anticipated (growing risk) or if we see a concerning escalation (US troops deployed for ground assault) this could see energy prices dramatically higher, stoking deeper inflationary fears and shifting the ECB into tightening mode, away from easing altogether. Only a near-term de-escalation of the conflict looks likely to change the narrative here for the ECB and EUR.
Technical Views
EURUSD
The reversal from YTD highs has seen the market breaking back down below the 1.1756-level with price now sitting just above the 1.490 support. This is a key pivot the market which bulls need to defend to prevent a much deeper drop towards the 1.1126-level medium-term.
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With 10 years of experience as a private trader and professional market analyst under his belt, James has carved out an impressive industry reputation. Able to both dissect and explain the key fundamental developments in the market, he communicates their importance and relevance in a succinct and straight forward manner.