EUR/USD: Slow rebound trajectory linked to Hormuz uncertainties – NBC

Euro Outlook: Recovery Expected Despite Recent Weakness

Economists Stéfane Marion and Kyle Dahms from National Bank of Canada have noted the Euro's recent decline against the US Dollar, following heightened tensions in Iran and an energy price surge. Despite these setbacks, they anticipate the EUR/USD exchange rate will rebound, provided that geopolitical risks and oil prices stabilize. They argue that current market expectations for more than two European Central Bank rate hikes in 2026 are overly optimistic, predicting the ECB will likely maintain its current stance as the Euro gradually climbs back toward the 1.18–1.20 range.

Impact of Energy Disruptions and ECB Policy on Currency Trends

By the end of March, the Euro had dropped to 1.15 against the Dollar, marking a decline of over 2% for the month—the steepest fall in nearly twelve months. Although the currency briefly touched 1.16 in early April amid speculation that the US might scale back its military involvement in Iran, uncertainty about the timeline for resolving the conflict has kept the Euro under pressure. According to revised forecasts, the EUR/USD pair could reach a low of 1.13 in the second quarter, with a potential recovery to 1.18 by year-end if hostilities ease significantly.

Market participants have reacted strongly to these developments, now anticipating slightly more than two ECB rate increases in 2026, compared to none before the recent conflict. The economists believe this expectation is exaggerated, as the ECB faces a difficult decision: raising rates during a supply shock that is already reducing real incomes and weakening consumer confidence could prove counterproductive.

Looking ahead, Marion and Dahms maintain a positive outlook for the Euro, assuming the disruption in Hormuz is temporary and the ECB avoids tightening policy during economic weakness. However, they caution that risks have become more pronounced. A rapid resolution of tensions could accelerate the Euro's return to the 1.18–1.20 range, while a prolonged blockade during Europe's critical storage refill period could derail the recovery and potentially push the currency below its mid-March lows.

(This article was produced with assistance from an AI tool and subsequently reviewed by an editor.)