Commerzbank’s Thu Lan Nguyen argues that escalating conflict in the Middle East and a potential Oil supply shock are negative for EUR/USD. The bank highlights the United States’ reserve currency role, its net Oil exporter status and relatively stronger economic resilience versus the Euro area.

Middle East conflict seen Dollar supportive

"The reaction at the center of everything is that of the oil market. A sharp and prolonged rise in oil prices would undoubtedly have massive implications for the global economy."

"I already mentioned this point on Thursday: since the United States is now a net exporter of oil, a rising oil price improves the US terms of trade. This means nothing other than that US goods become more expensive relative to goods in the euro area - or, put differently, the real effective USD exchange rate appreciates."

"An oil price shock is a burden for any economy. In general, however, people are likely going to assume that the US economy will prove more resilient to such a shock than the euro area economy, not least because the latter is a net importer of oil."

"This in turn implies that the US Federal Reserve could respond to the inflationary consequences of rising oil prices with more aggressive interest rate hikes than the ECB, which would have to take greater account of a weakening economy."

"There are good reasons to assume that the US side has no interest in prolonging the conflict. Nevertheless, the risk that the United States and its allies could be drawn into a prolonged war cannot be ignored."

"The latter would mean that the Strait of Hormuz could remain blocked for an extended period of time, resulting in a sustained oil price shock - similar to what was observed after Russia’s invasion of Ukraine in February 2022."

"By way of reminder: Brent crude prices at that time rose from levels around USD 100 per barrel to nearly USD 140, and only began to fall sustainably again from mid‑year onward. Meanwhile, the EUR‑USD exchange rate fell from levels around 1.13 in February to as low as 0.95 in September of the same year."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)