Euro: Energy risks weigh on EUR against US Dollar – MUFG

FXStreet Insights Team FXStreet

MUFG’s Derek Halpenny highlights continued Euro weakness, noting EUR remains the worst performing G10 currency this month despite a narrowing OAT/Bund spread and more supportive swap differentials. The analysis links renewed EUR/USD downside to rising natural gas prices and growing investor scepticism over the European economy’s ability to withstand the ongoing energy price shock.

Euro slides despite supportive spreads

"For the euro, the notable narrowing of the OAT/Bund spread did little to bring EUR buyers to the market and that underlines the continued negative sentiment and momentum."

"For much of the time in recent months, rising natural gas prices had limited impact on the euro with ECB rate hike expectations strengthening to provide support."

"However, EUR/USD is now sinking again even though the 2-year swap spread has moved by nearly 15bps in favour of the euro since 5th October."

"The European economy has shown resilience to date to the energy price shock but investors are turning sceptical over the prospect of that resilience continuing."

"The focus looks to have shifted away from imminent OAT risks to the risk to the economy from rising energy prices – natural gas prices."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

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