Euro: Energy repricing shapes outlook against US Dollar – ABN AMRO

ABN AMRO’s Georgette Boele notes that the Euro’s relationship with energy prices has evolved, with recent Oil and Gas gains again weighing on EUR/USD. Earlier in the US-Iran conflict, higher energy prices hurt the Euro (EUR), but later the pair became more driven by Federal Reserve (Fed) and European Central Bank (ECB) expectations. She now sees EUR/USD guided by central bank expectations, yield spreads and Eurozone energy risks.

Euro sensitivity returns to energy moves

"At the start of the US-Iran conflict, higher energy prices weighed on the euro against the US dollar. During the conflict, however, EUR/USD became less sensitive to energy prices and more sensitive to expectations for the Fed and the ECB."

"When a Memorandum of Understanding was announced, energy prices fell sharply, but the euro gained little against the US dollar because markets were focused on expectations of Fed rate hikes."

"As a result, oil and gas prices rose strongly, supporting the currencies of energy exporters such as the Norwegian krone, Canadian dollar and US dollar. At the same time, currencies of energy importers weakened."

"The euro again declined against the US dollar as energy prices rose."

"Going forward, the direction in EUR/USD will depend on expectations for the Fed and the ECB, inflation expectations, changes in nominal and real yield spreads between the US and Europe, and perceptions of possible energy shortages in the eurozone."