The Euro has been subjected to significant selling after the US and Israel launched attacks against Iran while the dollar has gained support on defensive grounds.
The Euro to Dollar (EUR/USD) exchange rate dipped sharply to 7-month lows around 1.1415 last week before a tentative recovery to just above 1.15. Brent crude is still trading just above $100 p/b with the Straits of Hormuz still effectively closed to traffic.
HSBC still sees short-term EUR/USD downside risks to 1.10-1.12 amid the threat to energy supplies, although it still expects a recovery to 1.18 at the end of 2026.
The bank considers that the Euro is less vulnerable than it was in 2022 when the Ukraine war triggered sharp losses amid a surge in gas prices. Nevertheless, given the dependence on imported energy, it still sees important downside risks to the currency when energy prices increase, especially as there is a direct impact undermining the trade account.
HSBC does note that the ECB has managed to strengthen the Euro’s resilience to financial shocks, but it still considers that the currency will be vulnerable when risk appetite deteriorates, especially as there is still no unified fiscal policy.
