EURUSD: between European stagflation and geopolitical shock

The situation in the eurozone, especially in Germany, its “engine,” is deteriorating rapidly due to the ongoing conflict with Iran. It is worth noting that Germany, like other European countries, is heavily dependent on energy imports; therefore, the continued impasse regarding the closure of the Strait of Hormuz darkens the long-term outlook for the euro.

• Drastic Revisions in GDP Forecasts: The German Ministry of Economy halved its GDP growth forecasts for 2026, reducing them from 1.0% to just 0.5%. The outlook for 2027 has also been revised downwards to 0.9%.
• Inflationary Pressures: Despite economic slowdown, inflation in Germany is expected to reach 2.7% in 2026 and 2.8% in 2027. The Bundesbank warns of a “real shock” related to the crisis in the Middle East, predicting a potential kerosene shortage in the next six weeks.
• Trade Risks: While Donald Trump’s ability to impose widespread tariffs is limited, the possibility of sectoral tariffs remains, which could significantly impact the crucial German economy.

European Central Bank’s Rate Outlook: Caution and Lack of Alternatives

Statements from the European Central Bank officials reflect a delicate balance between fighting inflation and supporting economic growth.

• No Rate Hike in April: Gediminas Simkus, a member of the ECB Governing Council, made it clear that the bank is not expected to raise interest rates at the April meeting. The current deposit rate of 2.00% is deemed appropriate given stable underlying inflation, despite spikes in overall inflation caused by energy prices.
• Possibility for 2026: However, Mr. Simkus does not rule out a later increase in the year, citing structural risks such as rising defense spending and supply chain disruptions.
• Euro’s Weakness as a Safe Haven: Philip Lane, Chief Economist of the ECB, acknowledged that the euro is currently unable to replace the dollar as a global safe haven. Mr. Lane cites the lack of unified European “safe assets” (similar to U.S. Treasury bonds) and the political fragmentation of the eurozone as major obstacles.

At present, the market does not foresee a significant risk of a rate hike in April. However, if inflation becomes a concrete issue, the likelihood of an increase this year remains strong. Additionally, the market anticipates up to two hikes by the end of the year. The first could occur in June or July, although the central bank is likely to wait for the end of the conflict or respond to a significant rise in gas prices on the TTF, which is a key factor for the EUR/USD pair. Source: Bloomberg Finance

EUR/USD Analysis: The Dollar Remains Dominant

The EUR/USD pair is under significant downward pressure, resulting from a combination of fundamental and geopolitical factors.

• Growth Divergence: While the United States shows relative resilience, Europe (led by Germany) is sliding into stagnation. Investors favor the dollar due to the depth and liquidity of the American bond market.
• Risk Factors: Potential U.S. tariffs and a prolonged energy crisis in Europe continue to support the dollar.

EURUSD is sharply retreating, reaching its lowest levels since April 13. The pair is below its uptrend line, indicating that the market continues to perceive significant risk related to the conflict in the Middle East. While EURUSD seems relatively well-valued in terms of yield differentials, speculative investors have recently started favoring the U.S. currency, selling the euro massively. This situation could reverse once energy prices start to decline, and investors shift away from U.S. assets in search of other opportunities, especially considering considerable risks related to U.S. debt and upcoming midterm elections.

In the meantime, German bond yields have recently experienced a significant decline, despite expectations of potential ECB rate hikes. Nevertheless, the EUR/USD pair remains adequately valued in terms of yield differentials.