EUR/USD: Gradual recovery path tied to Hormuz risks – NBC

National Bank of Canada (NBC) economists Stéfane Marion and Kyle Dahms describe recent Euro (EUR) weakness versus Dollar (USD) after the Iran conflict and energy shock, but keep a recovery bias for EUR/USD. They see market pricing for more than two European Central Bank (ECB) hikes in 2026 as excessive, expecting the ECB to stay on hold while EUR/USD gradually recovers toward 1.18–1.20 if Middle East tensions and Oil prices normalize.

Energy shock and ECB repricing shape outlook

“The euro ended March at the 1.15 level, having lost more than 2% against the dollar over the month, its worst monthly performance in nearly a year. After peaking near 1.16 in early April on news that the US may wind down its military campaign in Iran, the pair has retreated as the U.S. administration has offered no clear timeline for resolution, leaving the currency trapped between fragile hope and persistent risk. Our revised quarterly path reflects this with a potential bottoming out at 1.13 in Q2, recovering to 1.18 in Q4, conditional on a meaningful easing of hostilities.”

“Markets have moved aggressively on this signal, now pricing a little more than two hikes in 2026, up from zero before the conflict. We believe this shift in pricing is overdone. The ECB faces a bind: tightening into a supply shock that is already compressing real incomes and dampening confidence risks doing more harm than good.”

“We maintain a recovery bias over the balance of the year, anchored by the view that the Hormuz disruption is ultimately temporary and that the ECB will resist the temptation to tighten into weakness. The distribution of risks, however, has widened considerably. A swift de-escalation supports a faster return toward 1.18–1.20; a blockade that persists through the summer refill season, precisely when Europe needs to rebuild storage, would put the entire recovery path in question and could even see the pair surpass the mid-March lows.”

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