The euro risks further weakness against the US dollar amid the prolonged Strait of Hormuz crisis and the widening macroeconomic divergence between the two regions.
The US dollar is fundamentally supported by contrasting data: US macroeconomic metrics have recently beaten market expectations, while the European economy persistently generates negative macroeconomic data.
Although both regions face imported wartime inflation and rising government spending, the drivers of rising yields in sovereign bond markets are fundamentally different:
· The US: Treasury yields are rising thanks to robust business activity and real economic expansion.
· The eurozone: GDP growth is fading, yet German bund yields are not falling solely because of inflation fears.
Analysts warn of a growing risk of a monetary policy mistake by the European Central Bank. If the eurozone’s economic slowdown deepens while the ECB keeps interest rates on hold or raises them in response to incorrect triggers, this could cause a sharp flattening of the yield curve.
A decline in speculative positions in the dollar opens room for further dollar appreciation, especially if the Middle East conflict remains in a hot phase.
For the European stock market, a weak euro means the current trend should continue: exporters will outperform domestically oriented businesses. Analysts believe that only a complete resolution of the military conflict can restore investor interest in Europe’s cyclical, domestic companies and push the EUR/USD pair higher.
