BNY’s Bob Savage reports that Eurozone data and ECB comments point to rising downside risks for the euro, as the Iran war and an energy shock weigh on growth and sentiment. The euro is described as the weakest performer among major currencies, with outflows also affecting lower-yielding currencies such as the JPY, SEK and NZD.
ECB Governing Council member Dimitar Radev says the euro-area outlook may be worsening more than expected because of war-related energy risks and higher uncertainty. He notes that stronger transmission of shocks to inflation expectations could add to price pressures.
Euro Downside Risks Increase
Radev says that if the shock feeds into wages, margins and expectations, the cost of delaying action rises, which could support a quicker policy response. He adds that it is still too early to know if there will be enough data for a clear decision at the ECB’s April meeting.
Pierre Wunsch says the ECB may need to start raising rates as soon as April and could keep tightening if the energy shock persists. He warns about second-round effects and notes inflation rose to 2.5% in March and could increase further.
The Euro is facing significant pressure from both slowing growth and persistent inflation, driven by the energy shock from the conflict in the Middle East. For derivative traders, this creates a clear case for maintaining bearish positions on the EUR, particularly against safe-haven currencies like the US dollar. We are seeing the EUR/USD pair struggle to hold its ground, currently trading around 1.0850 after failing to breach resistance late last month.
The high degree of uncertainty surrounding the ECB’s next move and the duration of the energy crisis points toward increased market volatility. The Euro Stoxx 50 Volatility Index (VSTOXX) has already reflected this tension, climbing to over 16 from the calmer levels near 13 that we observed at the end of 2025. Traders should consider strategies that benefit from price swings, such as purchasing straddles on the EUR/USD ahead of key inflation data releases.
April Meeting Key For Markets
The ECB’s upcoming April meeting is now a critical event, with policymakers signaling a willingness to hike rates to combat second-round inflation effects. They are clearly trying to avoid the perceived policy error from 2022 when they were seen as too slow to react to surging prices. This hawkish stance means options on short-term interest rate futures could be used to position for a potential rate increase that the market may not be fully pricing in.
This entire situation stems from the energy shock, which continues to fuel inflation and harm consumer sentiment. With Brent crude prices holding firmly above $89 per barrel, a level not consistently seen since the third quarter of 2025, the pressure on the European economy is not abating. A long position in oil futures or options could serve as a direct trade on the geopolitical conflict or a hedge against further economic deterioration in Europe.
ECB officials are fixated on whether high energy costs will lead to higher wage demands, which is the classic “second-round effect” they fear. Given that Eurozone negotiated wage growth was still elevated at 4.5% in the final quarter of 2025, the central bank has a credible reason to act pre-emptively. We must watch the upcoming core inflation and wage data for March very closely, as this will determine the ECB’s actions.
