Rabobank’s FX Strategy report says the euro was an important driver of last year’s EUR/USD rise, alongside the well-documented weakening in the dollar. It links the move to Germany’s loosening of its debt brake, which improved expectations for European growth and helped propel the single currency higher.
The bank now expects Europe’s outlook to cool as inflationary effects from the closure of the Strait of Hormuz weigh on activity, and it flags the risk that ECB growth forecasts will be revised lower in the next round. While the euro has drawn some support in recent months from expectations of an ECB rate hike, Rabobank says those assumptions are already priced in. It still sees scope for a near-term recovery in EUR/USD, but keeps projections below consensus, with a three-month target of 1.16.
Energy Price Shocks and the Euro’s Diminishing Strength
We believe the Euro’s previous strength is fading as Europe’s growth outlook darkens. The inflationary shock from recent events in the Strait of Hormuz is creating significant headwinds for the economy. This pressure makes it likely the European Central Bank will be forced to lower its growth forecasts soon.
The impact is already visible in energy markets, which directly affects European industry and consumers. Brent crude prices have surged over 15% in the last quarter, now trading around $95 a barrel, and this is feeding into higher production costs. Recent data shows Eurozone producer price inflation jumped by 1.1% last month, a trend that will squeeze corporate margins and consumer spending.
Monetary Policy Divergence and EUR/USD Outlook
Confidence indicators are also flashing warning signs about the economic slowdown. Germany’s ZEW Economic Sentiment index, a key forward-looking indicator, posted an unexpected decline this month to 41.5, suggesting investors are bracing for tougher conditions ahead. This aligns with our view that the ECB’s current growth projections are too optimistic and a downward revision is imminent.
While expectations for an ECB rate hike have supported the Euro, this is now largely priced into the market. In contrast, the US just reported another robust jobs number, with non-farm payrolls adding 265,000 jobs, giving the Federal Reserve more flexibility to maintain its current policy. This policy divergence is likely to put downward pressure on the EUR/USD pair.
Given this outlook, we see opportunities in positioning for a weaker Euro over the next quarter. Derivative traders should consider buying EUR/USD put options with September 2026 expiries to capitalize on a potential move towards our 1.16 forecast. This strategy offers a defined-risk way to profit from the expected decline in the currency pair.
We have seen this dynamic before, particularly during the 2022 energy crisis in Europe. The resulting spike in inflation and fears of a deep recession drove the EUR/USD below parity for the first time in two decades. This historical precedent shows how quickly sentiment can turn against the Euro when faced with a severe energy shock.
