EURUSD - what to expect?

This week marked a turning point in the macroeconomic context, as the market simultaneously experienced a geopolitical shock, an energy impulse, and a shift in central bank rhetoric. It was their combination that determined currency movements, interest rate expectations, and the overall trading regime.

The escalation around Iran acted as a key trigger. The market quickly priced in the risk of energy supply disruptions, which was reflected in a sharp rise in oil prices. Brent climbed to levels around $119 per barrel, then corrected closer to $107 amid statements about the possible opening of the Strait of Hormuz and signs of de-escalation. The important thing is not the price level itself, but its instability – it is this that shapes inflationary expectations and influences central bank policies.

The energy factor directly translates into inflation. Rising oil prices mean higher costs throughout the economy, forcing central banks to re-evaluate their plans. That is why this week, the key was not the interest rate decision itself, but the change in rhetoric.

The Federal Reserve left the rate unchanged and gave no clear signals regarding immediate policy tightening. The market interprets this as a relatively dovish stance, maintaining expectations of rate cuts later this year. This means that the Fed tends to view the current inflationary impulse as temporary.

The European Central Bank also did not change the rate but significantly hardened its rhetoric. Attention to inflationary risks increased, and the market began to price in the possibility of a rate hike as early as April, whereas previously expectations were shifted to mid-year. This shifts the balance in favor of the euro through the interest rate channel.

The Bank of England sent an even tougher signal. The unanimous decision to hold the rate and the readiness to react to inflation led to a sharp revision of expectations – the market began to price in significant rate hikes by the end of the year. This supports the pound and underscores the general trend of tighter policy outside the US.

Thus, a key asymmetry is forming: the US is moving towards policy easing, while Europe and the UK are shifting towards tightening. This difference determines the medium-term direction of the currency market.

The US dollar showed mixed dynamics during the week. On the one hand, it receives support as a safe-haven asset during periods of geopolitical tension. On the other hand, it weakens due to a decrease in interest rate advantages. Recent movements have shown that even against a backdrop of high oil prices, the dollar can lose ground if other central banks become more hawkish.

The euro remains under short-term pressure due to the energy factor, as Europe is an energy importer. However, in terms of interest rates, the situation is changing in its favor. The pound receives support due to the Bank of England's hawkish stance. Commodity currencies remain stable thanks to a combination of high interest rates and global demand for yield.

The assessment voiced by analysts is that, despite current risks, EUR/USD could reach 1.20 within the year. The main logic of this scenario is the expected rate cuts in the US against the backdrop of a more hawkish ECB policy, which creates a favorable differential for the euro. An additional factor is that the risks to Europe's gas market appear less systemic than the risks to the global oil market.

In the short term, the situation remains unstable. Current EUR/USD levels partially do not fully account for the energy factor, which creates a risk of correction. However, in the event of de-escalation of the conflict and stabilization of energy prices, the market will quickly return to monetary policy issues, which will open the way for the euro to strengthen.

The forecast for the near term is based on three scenarios. In the event of de-escalation and a decrease in oil prices, the dollar will lose support, and EUR/USD may move towards 1.17 with further potential to 1.20. In the event of continued tension and high energy prices, the dollar will remain strong in the short term. If the situation remains mixed, the market will maintain high volatility without a clear trend.

Thus, the market structure is determined by two levels. In the short term - the energy factor and geopolitics. In the medium term - the interest rate differential. And it is the second factor that creates the potential for a stronger euro in the outlook for this year.