Iran tensions pose 'double-edged' sword for Euro

Yesterday’s weak US inflation report was enough to send the euro surging back above the 1.145 level on the dollar. Gains in the common currency are perhaps being slightly held back by the ongoing uncertainty in the Middle East and the latest surge in oil prices - if we recall, the Euro Area is a net importer of energy, so an increase in oil prices is typically viewed as a net negative for the bloc’s economy.

We note that this is somewhat of a double-edged sword for the euro, however, as the Euro Area’s high exposure to imported oil inflation means that it is more likely to narrow, rather than widen, rate differentials between the Fed and the ECB.

On the data front, this morning’s industrial production figures were a disappointment.

Output fell 0.2% MoM in May, missing expectations for a 0.2% rise, while April's print was also revised lower. The year-onyear figure told a similar story, with production contracting 1.2% versus consensus for a more modest 0.5% decline. The double miss and the accompanying downward revisions paint a weaker picture of the bloc's manufacturing sector than markets had accounted for, while adding a layer of concern to the ECB's growth outlook.

We still favour the ECB to adopt a cautious approach to hikes this year though, as with the Fed, this will clearly be highly dependent on the state of the US-Iran peace talks.