Euro: Oil-price sensitivity and war-end effects – Commerzbank

Commerzbank’s Michael Pfister argues that lower Oil prices can initially restrain the Euro (EUR) by reducing European Central Bank (ECB) rate expectations. Over time, however, a lasting end to the Iran conflict could support the currency through stronger Purchasing Managers’ Index (PMI) and improved real economic activity.

Oil, rates and Euro reaction

“Over the past few weeks, I have argued on several occasions that the euro might not directly benefit from an end to the war, should interest rate expectations for the ECB ease as oil prices fall. But this does not apply solely to the euro. Since the start of the Iran conflict, the trend in interest rate expectations for the major G10 central banks can, in fact, be divided into two groups:”

“The greater the dependence on energy imports, the stronger the reaction of central bank interest rate expectations to a change in the oil price. In other words, if oil prices rise, so do expectations of interest rate hikes. This applies to the ECB, as well as to the BoE and the Swiss National Bank. But this also means that these expectations will be priced out again should the oil price fall.”

“We thus have two arguments: net energy exporters are likely to suffer deteriorating terms of trade when the oil price falls, while their interest rate expectations are less dependent on the oil price. This is likely to be the main reason why the inverse relationship (i.e. appreciation due to lower energy dependence in the event of falling oil prices) is weaker than when oil prices rise.”

“One point I have omitted so far is that the real economies of net energy importers would also benefit from a lasting end to the Iran conflict. Leading indicators such as the PMIs are likely to react first. But this reaction is likely to take longer than the reaction seen with interest rate expectations.”

Register a Revolut Business Account