The Euro to Dollar (EUR/USD) exchange rate has struggled to make further headway in recent weeks and is trading near 1.1630 after retreating from May highs close to 1.1800.

Lloyds Bank nevertheless maintains a constructive medium-term outlook for the single currency and expects EUR/USD appreciation to continue, although the pace of gains could be slower than previously anticipated.

The bank acknowledges that the Eurozone economy has lost momentum in recent months as higher oil prices have weighed on confidence and business activity.

According to Lloyds, the rise in energy prices has triggered a stronger behavioural response in Europe than in other major economies. Although the latest oil shock is modest compared with the energy crisis seen in 2022, households and businesses remain sensitive to rising energy costs.

This slowdown in activity has prompted a shift in European Central Bank policy expectations, with the ECB moving back towards a tightening bias in response to renewed inflation concerns.

Lloyds believes there is a risk that policymakers may be overreacting if energy prices stabilise or if anticipated supply disruptions prove less severe than currently feared.

The bank notes, however, that inflation was relatively subdued before the latest oil-price surge and that monetary policy is broadly neutral. In this context, any additional ECB tightening should be limited and manageable for the wider economy.

As a result, Lloyds expects the current slowdown to moderate the recovery rather than derail it completely. The bank still sees underlying support for Eurozone growth once energy market concerns begin to ease.

Lloyds also considers that the Euro continues to benefit from longer-term structural factors. The Eurozone offers investors a high degree of institutional stability and policy predictability at a time when global political and economic uncertainty remains elevated.

Efforts to strengthen the region’s economic resilience through investment and fiscal initiatives should also support investor confidence over time, particularly if external challenges encourage policymakers to accelerate reforms.

While Lloyds accepts that EUR/USD gains may be more gradual in the near term, it believes the broader appreciation trend remains intact. According to the bank, it would take a decline below 1.1392 to seriously undermine the constructive medium-term outlook for the Euro against the US Dollar.