FX Daily: Iran fall-out coming home to roost in EUR/USD
At a Glance
The EUR/USD pair faces downward pressure as stagflationary headwinds from geopolitical tensions in Iran increasingly weigh on European economic prospects. Per the full note from ing-think, the detrimental effects of rising inflation, coupled with stagnant growth reflected in recent European PMI data, suggest a shift in market sentiment regarding the ECB's monetary policy stance. As economic indicators hint at potential dovish adjustments from the ECB, consensus pricing may adjust downwards. Our recent analysis highlights the divergence in consensus targets, with several banks expecting the EUR to trade near 1.20 by the end of 2026, while current spot is notably lower at 1.1500.
Key Takeaways
- 01Stagflationary pressures from Iran are increasingly impacting the EUR/USD outlook.
- 02Recent European PMIs signal stagnation, likely curtailing ECB tightening expectations.
- 03Current EUR/USD spot at 1.1500 contrasts with consensus targets clustering near 1.2000.
- 04Divergence in firm forecasts indicates uncertainty about the future trajectory of the euro.
Full Analysis
What the desk is arguing
The desk posits that the fallout from stagflationary pressures resulting from the Iranian situation will likely intensify in Europe, thus further weighing on the EUR/USD currency pair. The erosion of economic momentum in Europe, as indicated by recent PMI data, is likely to inhibit tightening measures from the ECB and can lead to a depreciation of the euro against the dollar.
Recent European PMI outputs have highlighted an alarming trend, showing that stagnation effects are beginning to compound the existing inflationary pressures. This aligns with the expectation that the ECB may need to reconsider its tightening trajectory, further supporting the case for a lower EUR/USD.
Where it sits in our coverage
Our consensus target for EUR/USD currently sits at 1.2000, with a range reflecting expectations from various firms including jpmorgan (1.2000), goldman (1.2500), and deutschebank (1.2500) for December 2026.
This view is consistent with the broader market consensus which foresees EUR/USD strengthening over time; however, the desk's positioning may cross-check against the lower bounds of the consensus, given current depressive PMI forecasts.
How other firms see it
(#Also see the coverage for related pairs). Generally, banks such as goldman and morganstanley are aligned with a more bullish outlook on EUR/USD, forecasting targets at or above 1.2000 by the end of 2026. Conversely, firms like citi hold a more bearish stance, anticipating a spot price of 1.1300 by March 2026, indicating significant divergence in strategy.
Given the acute focus on the ECB's interest rate decisions, attention should also turn towards related currency pairs such as EUR/CHF, where ECB actions may influence Swiss haven flows, and USD/JPY, which will reflect the broader impact of US monetary policy nuance.
Market Implications
Traders should watch for movement towards the 1.1400 level as a gauge of market sentiment against the dual headwinds of stagnation and inflation. Additionally, monitor ECB rhetoric closely; any signal of dovish policy shifts could catalyze further downside in EUR/USD.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2027 |
|---|---|---|
Goldman Sachs | Bearish | 1.1200 |
UOB | Neutral | 1.1450 |
Citi | Bearish | 1.1000 |
From the original
EUR/USD was hit in March on expectations that the stagflationary shock from Iran would resonate more in Europe than the US. The inflationary effects have been plain for all to see, but this week's release of European PMIs warns that the stagnationary effect is just starting to la
Related speeches
4 itemsFX Daily: Iran fall-out coming home to roost in EUR/USD
The desk sees the recent geopolitical tensions stemming from Iran as negatively impacting the euro against the US dollar, specifically projecting an imminent pullback in EUR/USD. They highlight a potential decrease in risk appetite among investors, which has historically led to dollar strengthening, particularly in uncertain market conditions. Per the full note from ING, the current price of EUR/USD at 1.1500 suggests that the pair is trading below many forecasts, representing a gap that may need to close as sentiment shifts. Given the absence of high-impact economic events for the next month, traders are likely to react to shifts in market sentiment around geopolitical developments.
Eurozone inflation eases, putting worst case scenarios on hold
As inflation in the Eurozone continues to ease, the desk believes that the worst-case scenarios surrounding a potential price spike are being postponed, presenting a more favorable outlook for the EUR/USD pair. Per the full note from ing-think, Eurozone inflation fell from 3.2% in May to 2.8% in June, driven largely by lower energy prices. This trend appears to reinforce a dovish stance from the European Central Bank (ECB), as President Christine Lagarde's recent speeches suggest a potential reassessment of interest rate trajectories amid sluggish economic growth.