In charts: Three scenarios for energy, macro and markets
At a Glance
The desk posits that the ongoing Middle East conflict is likely to exert upward pressure on energy prices, which in turn could influence inflation and central bank policies, particularly in developed economies. Per the full note source, this scenario suggests that oil and gas markets may experience heightened volatility, with implications for FX markets as traders adjust to shifting macroeconomic indicators. Current positioning indicates a cautious approach, with traders bracing for potential disruptions in energy supply. The consensus among major firms reflects a range of expectations, with specific targets indicating a divergence in outlooks on currency pairs influenced by energy prices.
Key Takeaways
- 01Three scenarios for Middle East conflict range from contained to severe, with major energy and macro implications.
- 02Oil price spikes could delay central bank easing, supporting USD and weighing on EUR.
- 03Current market pricing may underestimate tail risks; asymmetric downside for EUR/USD.
Full Analysis
What the desk is arguing
The desk outlines three scenarios for how the Middle East conflict could unfold, ranging from a contained regional skirmish to a full-blown escalation involving major energy producers. Each scenario carries distinct implications for oil and gas supply, inflation trajectories, central bank responses, and consequently, FX markets.
Supporting evidence draws from historical patterns of geopolitical shocks and their transient vs persistent effects on energy prices. The desk implicitly rejects the notion that markets have fully priced in tail risks, arguing that current volatility underestimates the probability of supply disruptions.
Where it sits in our coverage
Our coverage currently maintains a neutral-to-bearish view on EUR/USD, with consensus target at 1.075 for Dec-26, reflecting a baseline assumption of gradual geopolitical de-escalation. The firm spread between our house view and consensus is roughly 1-2%, as we see asymmetric downside risks to the euro if energy costs spike.
Specific firms align or diverge as follows: - Barclays published a Dec-26 target of 1.04, reflecting a more bearish euro view under an escalation scenario. - JPMorgan targets 1.10 for Dec-26, expecting a relatively contained conflict with limited FX impact.
How other firms see it
- Barclays aligns with the escalation scenario, seeing higher oil prices weighing on the euro. They expect EUR/USD to drift lower.
- JPMorgan takes a contrary stance, arguing that central bank reaction functions will limit FX dislocations.
- ING (the source desk) presents these scenarios without a strong directional bias, focusing on risk management.
Market Implications
If the conflict escalates, oil prices could surge 20-30%, stoking inflation and forcing central banks to keep rates higher for longer. This would be positive for USD and negative for EUR and JPY. In a contained scenario, risk appetite recovers, and EUR/USD could grind back toward 1.10.
From the original
How the Middle East conflict could play out across oil and gas markets, plus inflation, central banks and FX
Related speeches
4 itemsGlobal Commodities: What are the Markets Missing?
The desk believes that the ongoing geopolitical tensions in the Middle East are creating significant upward pressure on commodity prices, particularly in energy markets. Per the full note by J.P. Morgan, attacks on critical energy infrastructure have intensified, leading to a precarious situation for oil and gas supplies. This backdrop is compounded by emerging signs of demand destruction in Asia, where soaring product prices are beginning to impact consumption patterns. With the consensus target for oil prices at 1.075, traders should remain vigilant as these developments unfold.
The Commodities Feed: Middle East re-escalation pushes oil prices higher
The desk believes that the recent re-escalation of tensions in the Middle East, particularly involving key oil-producing nations, is likely to sustain upward pressure on oil prices. Per the full note from ING Economics, this geopolitical uncertainty has already contributed to a notable increase in oil prices, with estimates suggesting a rise of nearly 5% recently. This context underscores the importance of commodity dynamics for currency movements, particularly for those currencies closely linked to energy exports.
The Commodities Feed: US-Iran peace deal hopes
The desk interprets the recent sell-off in energy markets as a reflection of heightened optimism regarding potential de-escalation in the Middle East, particularly between the US and Iran. Per the full note from ING Think, this optimism has led to a stabilization in prices after an initial sharp decline, although volatility remains a concern. Our consensus target for the EUR/USD is 1.075, with a range between 1.04 and 1.12, indicating that the market is pricing in cautious optimism but remains sensitive to geopolitical developments. The absence of high-impact economic events in the coming month suggests that traders will focus on geopolitical news as the primary driver of market sentiment.
Global Commodities: Oil and Gas Rocked by Conflict
Lead — The desk is positioning for heightened volatility in energy markets following recent military actions involving Israel and the US against Iran, which have severely disrupted oil and gas flows through the Strait of Hormuz. Per the full note from J.P. Morgan, commercial traffic has plummeted, with production shut-ins anticipated in the Gulf, raising concerns about supply shortages. This geopolitical tension is likely to influence currency pairs tied to energy exports, particularly those involving the USD and CAD. Our consensus target reflects these dynamics, suggesting a cautious approach in the face of potential escalation.
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