ING said Brent crude trading above $90 a barrel would typically imply EUR/USD below 1.14, but a tighter link between energy prices and short-dated euro swap rates has provided support. Higher energy costs have coincided with a narrowing in the EUR/USD two-year swap spread, with two-year EUR swap rates at a new high for the year; by contrast, last week’s US inflation release left short-dated US rates below their peaks.
The bank maintained a view that EUR/USD could slip back under 1.14, with 1.1380 cited as a near-term level for this week, while also pointing to the risk of a surprise European Central Bank rate rise at Thursday’s meeting. In Scandinavia, ING flagged scope for EUR/NOK to extend losses, targeting a move towards 10.95.
Derivative Positioning And The Energy-EUR/USD Correlation
We recommend that derivative traders position for EUR/USD to slide back below 1.14, targeting the 1.1380 level in the weeks ahead. While Brent crude trading above $90 a barrel would normally drag the Euro down much faster, a strong correlation between energy prices and short-dated Euro swap rates is currently keeping the currency afloat. Traders can take advantage of this temporary stability by buying short-term EUR/USD put options.
This supportive correlation mirrors historical patterns where expensive energy narrows the two-year EUR/USD swap spreads, keeping the pair higher than expected. Recently, two-year EUR swap rates reached new highs for the year, while easing inflation has kept US Treasury yields from climbing further. We advise watching these spreads closely, as any shift back in favor of the US Dollar will likely trigger a rapid downward move.
ECB Rate Hike Risks And Scandinavian Currency Opportunities
However, we must also account for the risk of a surprise interest rate hike from the European Central Bank. Policymakers may decide to react to sticky energy inflation by pushing through a rate hike earlier than the widely expected September timeline. Hedging with short-dated Euro interest rate calls will help protect trading portfolios against a sudden hawkish shock.
Meanwhile, the high-yielding, energy-exporting Norwegian krone offers an attractive secondary play. Driven by strong energy revenues, EUR/NOK is showing signs of renewed downward momentum. We expect the pair to slide toward the 10.95 level, making EUR/NOK put options a smart play for the coming weeks.
