Oil Prices vs Euro: A Complex Relationship in Times of Conflict

Commerzbank's Michael Pfister argues that lower oil prices can initially restrain the Euro (EUR) by reducing European Central Bank (ECB) rate expectations. The relationship between oil prices and interest rate expectations is not a one-way street, however.

According to Pfister, net energy exporters will suffer from deteriorating terms of trade when oil prices fall, which means their interest rate expectations are less dependent on the oil price. This contrasts with net energy importers like the ECB, whose expectations are more closely tied to oil prices.

Despite this, a lasting end to the Iran conflict could support the Euro through stronger Purchasing Managers' Index (PMI) and improved real economic activity. Leading indicators such as PMIs are likely to react first, but their reaction will take longer than the initial impact on interest rate expectations.