EUR/USD: Real rate shock weighs on Euro – OCBC

OCBC strategists Sim Moh Siong and Christopher Wong argue that higher nominal ECB rate expectations are failing to support the Euro as Oil-driven stagflation erodes the euro area’s real return and worsens its external balance. They stay neutral on EUR/USD, outlining downside scenarios toward 1.13–1.12 and potentially 1.10 if Brent spikes, while expecting modest Dollar weakness in 2026 if Middle East risks ease.

Oil stagflation undermines Euro resilience

"In an energy-driven stagflation shock, higher nominal rates don’t automatically support a currency. What matters for FX is the real return after inflation and the economy’s external balance. For the euro area, the latest oil spike hits on both fronts: it lifts inflation while simultaneously worsening terms of trade for a large net energy importer."

"We stay neutral on EUR/USD until clearer signs of de-escalation emerge, giving us more confidence that Middle East–driven stagflation risks won’t derail our baseline of modest USD weakness in 2026. In a moderately severe oil shock—prices near USD100/bbl through mid-year—EUR/USD could slip to 1.13–1.12."

"Under an acute scenario, with Brent spiking toward USD140/bbl and staying elevated, a further drop toward 1.10 or slightly below is plausible."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)