EUR/USD
EUR/USD has traded largely sideways since mid‑2025, hovering around 1.17, after a year of elevated volatility. The currency pair appears to have stabilised between its long‑term historical averages, around 1.12 (10‑year average) and 1.22 dollars per euro (20‑year average).
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- The escalation of the conflict in Iran prompted a near 3% appreciation of the dollar, modest relative to moves in other asset classes. Based on historical relationships with oil prices, real rates and risk indicators, such a shock would normally be consistent with a stronger dollar and EUR/USD below 1.10. The muted response points to a weakening of these correlations, leaving fair value harder to pin down and more contingent on geopolitical outcomes.
- A de‑escalation scenario, involving the reopening of the Strait of Hormuz, would likely trigger a correction in oil prices, ease inflation pressures — particularly in the euro area — and support risk appetite. In such a setting, the euro would be better placed to strengthen, with EUR/USD moving towards the 1.20 area.
- A prolonged conflict, by contrast, would keep energy prices elevated and raise stagflation risks in the euro area, arguing for a weaker euro and a return towards 1.10.
- The macro backdrop continues to favour the dollar: US growth remains relatively firm, supported by AI‑related investment and a labour market that has yet to show material slack. The drag from higher energy costs on consumption has so far been limited, although it remains a source of concern.
- On monetary policy, the ECB’s scope to sound more hawkish than the Fed has largely been priced in. The Fed, however, retains some capacity to surprise on the restrictive side, introducing a short‑term bias in favour of the dollar.
- Overall, under our central assumption that worst‑case geopolitical outcomes are avoided, EUR/USD is expected to drift higher towards 1.20 over the coming quarters, albeit with downside risks more pronounced than earlier in the year.