EUR/USD Remains Under Pressure, Energy Shock Worsens Euro Sentiment
Societe Generale assesses that the EUR/USD remains under pressure with a bearish bias in the short term as the market continues to repricing due to the energy shock. SocGen's Head of FX Strategy, Kenneth Broux, said that the surge in energy prices, including the strengthening of Dutch gas, is weighing on euro sentiment and making it difficult for the EUR/USD pair to build a recovery.
According to SocGen, the current EUR/USD movement is not driven by interest rate differentials. Market focus has shifted to growth risks in the eurozone as oil and gas prices rise sharply. Rising energy costs are seen as potentially pressuring consumption and corporate margins, making the growth outlook more fragile, although inflation could be pushed up.
On the policy front, the market is increasingly aggressively pricing in ECB tightening. SocGen noted that the implicit probability of a first interest rate hike in June is now around 84%, and ESTR pricing points to two rate hikes by December. However, the bank emphasized that this repricing is not enough to offset the burden on sentiment stemming from the energy shock.
Comments from ECB Board member Isabel Schnabel also highlight a core issue currently looming over policy: an energy shock could push inflation away from target, but the big question is whether the oil price increase is temporary or more persistent. The uncertainty over the duration of this energy shock is what makes the euro more sensitive and keeps EUR/USD under pressure.
Market Impact
EUR/USD: The bias remains bearish as long as energy is a key theme and eurozone growth risks intensify.
ECB pricing vs. EUR: Although the market is pricing in an ECB hike, the euro could remain subdued if investors focus more on the impact of energy on growth.
European risk sentiment: Expensive energy increases the risk of mild stagflation, pressuring European equities and widening FX volatility.
What market participants need to watch
Oil prices and Dutch TTF gas (whether the spike persists or subsides quickly).
Eurozone growth indicators (PMIs, business surveys, consumption data) to test the “growth hit” narrative.
ECB officials' comments on the persistence of the energy shock and tolerance for inflation.
ESTR Pricing: does the market still hold on to two hikes through December and an 84% chance of June.(Cp)
Source: Newsmaker.id
