The euro weighs up the risks

• The fate of the eurozone economy depends on oil prices.
• Japan warns of currency interventions.

The US dollar is poised to mark its best two-week rally since the US presidential election in November 2024. The rise in oil prices to their highest levels since August 2022, increased investor doubts about at least one act of monetary expansion by the Fed in 2026, and the greater isolation of the US economy from events in the Middle East compared to other regions are pushing the USD index higher.

According to estimates by the German IFO Institute, even with an imminent end of the war in Iran and the decline in oil prices, inflation in Germany will accelerate from the previously expected 2% to 2.4% by the end of 2026. The continuation of the armed conflict with black gold remaining at current levels will push consumer prices up to 3% and slow GDP growth from 1.2% to 0.6%.

The ECB and the EU see a repeat of the energy crisis in Europe as unlikely. Gas prices are far from those seen in 2022. However, if the closure of the Strait of Hormuz drags on into autumn, when cold weather arrives, a shock scenario in which the EURUSD falls below parity cannot be ruled out.

Problems with oil supplies are leading to overflowing oil storage tanks and a reduction in production across the Middle East. Moreover, restarting drilling rigs that have been shut down will not be easy. Tehran’s control over the Strait of Hormuz is driving up prices and putting unexpected pressure on Trump.

The surge in oil prices has led to a resumption of the upward trend in USDJPY. The yen, which is dependent on energy imports, continues to weaken, prompting verbal interventions by the Japanese government. Finance Minister Satsuki Katayama said that the authorities are ready to take all necessary measures on the currency. However, she did not specify any specific levels. She also did not address whether intervention in the Forex market would be effective if the main reason for the yen’s weakening is the Brent rally.

The FxPro Analyst Team