Euro: How are energy risks pressuring EUR against the US Dollar? – MUFG

Negative sentiment continues to weigh on the Euro, which remains this month’s weakest G10 currency despite a tighter OAT/Bund spread and more favourable swap differentials, according to MUFG’s Derek Halpenny. His analysis attributes the renewed decline in EUR/USD to higher natural gas prices and mounting investor doubts about the European economy’s capacity to weather the ongoing energy price shock.

Why is the Euro falling despite favourable spreads?

"For the euro, the notable narrowing of the OAT/Bund spread did little to bring EUR buyers to the market and that underlines the continued negative sentiment and momentum."

"For much of the time in recent months, rising natural gas prices had limited impact on the euro with ECB rate hike expectations strengthening to provide support."

"However, EUR/USD is now sinking again even though the 2-year swap spread has moved by nearly 15bps in favour of the euro since 5th October."

"The European economy has shown resilience to date to the energy price shock but investors are turning sceptical over the prospect of that resilience continuing."

"The focus looks to have shifted away from imminent OAT risks to the risk to the economy from rising energy prices – natural gas prices."

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