ING analysis says the euro tends to weaken when oil prices rise, even though risk-off moves in equities can offer some support. It adds that the euro has recently acted as a safe-haven alternative to the dollar.
Using a model based on 12-month rolling betas, the note estimates that another $5 rise in Brent could mean about a 1% fall in EUR/USD. It also says the relationship between oil and EUR/USD can strengthen during oil shocks, increasing downside risk.
Oil Impact On Eurusd
The note says EUR/USD is trading about 1% above a short-term fair value estimate that excludes oil and uses only rates and equities. It argues that, in a major escalation involving Iran, EUR/USD could fall towards 1.160.
On the macro calendar, the eurozone PMI releases are due, after a weaker ZEW index earlier in the week. The note expects the eurozone composite PMI to stay well above 50.0, the expansion or contraction threshold, and says any impact on the euro may be limited.
We see the euro in a poor spot when oil prices rise, as Europe’s status as a major energy importer makes its economy vulnerable. The recent flare-up in the Strait of Hormuz has pushed Brent crude past $92 a barrel, creating a direct headwind for the currency. This situation puts downside pressure on the EUR/USD pair in the coming weeks.
Our models, which look at 12-month rolling data, suggest that another $5 rally in Brent could translate to a nearly 1% drop in EUR/USD. The correlation often strengthens during energy shocks, meaning the risks are skewed towards an even larger selloff for the pair. Derivative traders should watch for increased implied volatility, making put options on the euro a strategy to consider.
Positioning For Further Downside
This is especially true as EUR/USD, currently near 1.0750, appears to be trading above its short-term fair value when calculated using just interest rates and equity performance. This suggests the market has been slow to price in the full extent of current geopolitical risks. This reluctance creates a clear opportunity for downside exposure.
Looking back at 2025, we saw the pair’s sensitivity to oil prices become somewhat muted. However, the current tensions are re-establishing this classic negative relationship more forcefully. Traders who grew accustomed to the weaker correlation last year may be caught off guard.
The latest economic data further supports a cautious stance on the euro. The flash Eurozone Composite PMI for February came in at a fragile 50.8, indicating that the economy has very little buffer to absorb an energy price shock. This weak growth profile amplifies the negative impact of higher oil costs.
In a scenario of major escalation in the Middle East, we believe EUR/USD could break key support levels. A move down toward the 1.0500 handle is a distinct possibility under such conditions. Traders should consider structuring positions that would profit from such a decline over the next month.
