Commerzbank’s Antje Praefcke argues that geopolitical tensions in the Middle East are increasingly negative for the Euro compared with the Dollar, given Europe’s dependence on energy imports and already sluggish growth. She warns that higher Oil prices could stifle Eurozone growth while forcing the ECB into a difficult policy trade-off, leaving EUR/USD biased lower as long as the conflict persists.

Geopolitics and energy costs hurt euro

"Europe is heavily dependent on energy imports. This means that the economy could suffer from a prolonged rise in energy prices. And this at a time when growth is already rather sluggish."

"Combined with high energy prices leading to rising inflation rates, this would be an extremely unfavorable combination for the ECB. It could find itself in a predicament, having to respond to a sharp, prolonged price increase and possibly even consider raising interest rates (following yesterday's surprise to the upside of February's inflation figures, the market already sees a chance of this happening, albeit a small one)."

"As a result, the market is likely to view geopolitical uncertainty as significantly more negative for the euro than for the dollar."

"Fundamental data, such as the first-tier data from the US this week (today ADP index, Friday NFP), or concerns about the Fed's independence, remain important issues. But they are overshadowed by the war in the Middle East."

"As long as the focus remains on this, the euro is likely to be on the losing side for the reasons mentioned above. And the longer the conflict lasts, the greater the risks for the euro, in my opinion."

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