BNY’s Head of Markets Macro Strategy Bob Savage reports that Eurozone data and European Central Bank (ECB) commentary indicate rising downside risks for the Euro, as the Iran war and associated energy shock weigh heavily on growth and sentiment [1]. ECB Governing Council member Dimitar Radev warned that the euro-area outlook may be deteriorating more than previously expected, citing increased risks from the Iran war and energy shock. Radev stated that the likelihood of a more adverse scenario has grown, with heightened uncertainty and stronger transmission of shocks to inflation expectations potentially accelerating price pressures [1].
Radev cautioned that if the shock begins to feed into wages, margins, and expectations, the cost of inaction would rise, making a timely policy response more appropriate. However, he noted it is still too early to determine whether sufficient data will be available for the ECB to take a clear decision at its April meeting [1].
ECB Governing Council member Pierre Wunsch echoed concerns, stating the central bank may need to begin raising interest rates as soon as April and potentially continue tightening if the energy shock from the Middle East conflict persists. Wunsch highlighted rising risks of second-round effects, with sustained high energy prices feeding into wages and broader inflation, which has already increased to 2.5% in March and could rise further [1]. Wunsch also stressed the need for the ECB to act to contain spillovers into core inflation, noting that policymakers were too slow to respond in 2022. He emphasized that future decisions remain data-dependent, with outcomes hinging on the duration of the crisis and its impact on inflation dynamics [1].
The EUR continues to lead underperformance among major currencies, followed by outflows from other relatively low-yielders such as the JPY, SEK, and NZD [1].
CONCLUSION
ECB officials are signaling increased downside risks for the Eurozone due to the Iran war and energy shock, with inflation rising and the possibility of rate hikes as soon as April. The market is reacting negatively, as the EUR leads underperformance among major currencies. The outlook remains highly uncertain, with future ECB decisions dependent on incoming data and the crisis's duration.