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The ECB’s ‘hawkish’ tone won’t eclipse building fears about oil price dynamics.

The euro-dollar exchange rate will find little support from the European Central Bank (ECB) owing to a deterioration in geopolitical sentiment and oil markets.

The ECB is expected to strike a ‘hawkish’ tone later today and hint at rate rises, which would usually benefit euro-dollar. However, ahead of the event brent crude oil prices are trading at four-year highs at $126 a barrel.

It’s reported Thursday that U.S. President Donald Trump will soon receive a briefing on new military options for action in Iran as negotiations are apparently going nowhere.
The rise in oil prices signals markets are positioning for fresh escalation and the realisation that there’s no imminent reopening of the Strait of Hormuz, the key shipping lane through which about a fifth of the world’s oil and natural gas flows.

“With the latest deterioration in market sentiment about the Middle East conflict, we don’t think the ECB will be hawkish enough to lift EUR/USD on its own,” says Francesco Pesole, FX Strategist at ING Bank. “Unless oil starts turning lower today, risks remain towards a move to 1.160.”

The U.S. President has made it clear he wants Iran to completely abandon ambitions to build a nuclear weapon, which Tehran’s leadership – now dominated by the military – refuses to do.

“The oil market has moved from ignoring headlines and hoping for resolution to fixating squarely on the physical scarcity and long-term threat to supply with the possible escalation of conflict now looming,” says Neil Wilson, UK Investor Strategist at Saxo Bank.

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The Eurozone is a net importer of oil and gas, meaning its economy is particularly exposed to higher import prices. The U.S. is a net exporter of oil, and is now the primary supplier to the Eurozone.
For euro-dollar, that dynamic is a headwind.

“The higher oil climbs, the more it weighs on European assets and the EUR/USD outlook,” says Fawad Razaqzada, Market Analyst at City Index.