The euro has sunk to a one-year low, with easing of tensions between the United States and Iran helping to cool oil prices and raise expectations that the European Central Bank will turn more dovish. The euro was quoted at $1.135 against the U.S. dollar on Wednesday, down from $1.165 before the U.S. and Iran first agreed to a conditional ceasefire on 8th April.
A provisional peace agreement to restore oil flows through the Strait of Hormuz has dramatically cooled global energy markets, with Brent crude for August delivery trading at $74.76 per barrel at 8.50 am ET on Wednesday, sharply lower from ~$115/bbl in May, while the comparable WTI crude contract was changing hands at $71.02/bbl.
The collapse in oil prices halts the inflationary pressures that had forced the ECB to announce a protective 25-basis-point interest rate hike earlier this month. The bank raised interest rates despite a slowing economy to combat surging inflation triggered by the oil price shock amid the Iran war.
Fresh June Purchasing Managers’ Index data show Eurozone business activity contracted for a third consecutive month, reflecting the economic hit from earlier high energy costs. However, the bank’s primary mandate is to stabilize inflation at 2% over the medium term, forcing it to prioritize price stability even when economic growth is weak. With energy-driven inflation rapidly fading and the economy cooling, traders have now slashed the probability of a second ECB rate hike from 50% to just 20%.
In contrast, a more hawkish stance at the United States’ Federal Reserve, which is signaling a “higher-for-longer” policy amid resilient consumer spending, has been driving a massive rally in the greenback. The U.S. dollar index, a metric that pits the dollar against a basket of six of the world’s leading currencies, has climbed to 101.45, ~4% higher from a year ago with the divergence between the Fed and ECB policies prompting investors to pull capital out of Europe and pile into the US dollar.
By Alex Kimani for Oilprice.com
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