MUFG analysts maintain a short EUR/USD stance, arguing that the Euro faces a larger negative terms-of-trade shock from higher Oil and natural gas prices. Their scenario analysis links a 60% crude rise to EUR/USD around 1.1300, with ranges of 1.16–1.18 in a benign outcome and 1.0700–1.1300 under a more severe escalation.

Euro vulnerable to higher energy costs

"Based on our regression analysis based on how the dollar responds to a 10% jump in crude oil prices, the EUR/USD drop of 3.0%-3.5% since the crisis began in consistent with the 50% advance from crude oil prices (our analysis shows for every 10% gain, EUR/USD drops 0.7%)."

"We continue to run a short EUR/USD trade view based on the risk skew of further US dollar gains over the coming weeks."

"In Scenario 1 we would see Brent crude oil in a range of USD 75-85 p/bl, which assume a risk premium of USD 10 p/bl is in the price for some time. The US dollar could weaken back modestly with EUR/USD in a 1.16-1.18 range."

"A crude oil price of USD 110 p/bl would be a near 60% increase from the pre-conflict level which based on our regression analysis would imply EUR/USD falling to 1.1300 – so we assume a Scenario 2 range of 1.1200-1.1600. De-escalation ultimately takes place it just takes longer to achieve than in Scenario 1."

"A 100% increase in crude oil prices and more in natural gas prices in Europe, the dollar gains further with scope for EUR/USD to drop as low as 1.0700. The EUR/USD range is 1.0700-1.1300."

"However, the increasingly hawkish repricing of ECB policy expectations is unlikely to prevent further EUR weakness, given the bigger negative terms of trade shock facing European economies from more expensive energy imports. EUR/USD has now broken below support at 1.1500, reinforcing our short EUR/USD trade idea."

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