Euro: Energy risks cap recovery against US Dollar – ING

ING’s Francesco Pesole notes that EUR/USD has rebounded above 1.140 on lower Oil prices but argues the move looks optimistic without a clear de-escalation in geopolitical tensions. Pesole stresses that elevated European gas prices are hurting the Euro’s terms of trade, while upcoming Eurozone data are unlikely to deliver enough domestic support to offset Dollar-safe-haven and Fed-related pressures.

Gas prices and geopolitics weigh on euro

"EUR/USD has bounced back above 1.140 as oil prices dropped sharply today. Still, that move looks somewhat optimistic given the absence of a clear de-escalation path. Any renewed military strikes could quickly send Brent back to $100/bbl and EUR/USD below 1.1380."

"Gas prices are another reason we remain cautious on EUR/USD unless tensions ease quickly. Even after today's decline, TTF is trading at €58/MWh, more than 30% above levels at the start of July and close to the March highs."

"So while Brent is nowhere near its peaks, gas is. Given its importance in eurozone energy imports, the euro's terms of trade – statistically the most important medium-term driver of EUR valuation – are also hovering near March lows and at levels comparable to 2023."

"Potential precautionary USD buying ahead of the FOMC may also weigh on the pair into Wednesday."

"On Friday, eurozone CPI is expected to rise above 3.0%, but with core inflation still near 2.5%, we do not think that will trigger aggressive hawkish repricing. Markets price 42bp from the European Central Bank by year-end, but that outlook should remain highly sensitive to ongoing oil volatility."