Middle East conflict weighs more heavily on eurozone PMI in May
Lead — The ongoing Middle East conflict is increasingly impacting the eurozone's economic outlook, particularly evident in the PMI data for May, which reflects a dip in sentiment. Per the full note from ING Economics, the conflict has exacerbated existing economic vulnerabilities, creating downward pressure on the eurozone's industrial output and consumer confidence. Recent PMI results show a decline compared to past months, indicating that geopolitical tensions are weighing heavily on economic activity in the region.
What the desk is arguing
The desk argues that the deteriorating situation in the Middle East will continue to pose significant risks to the eurozone's economic stability moving forward. According to ING, the conflict has not only disrupted supply chains but has also led to increased uncertainty among investors, contributing to the observed decline in PMI figures for May.
Supporting this view, ING highlights that the eurozone PMI dropped from 52.7 in April to 51.5 in May, signaling a cooling in economic momentum. This trend aligns with concerns over inflation impacts and reduced consumer spending as fears surrounding the conflict escalate.
Where it sits in our coverage
Our consensus target for the EUR/USD pair is set at 1.075, within a range of 1.04 to 1.12. The following firms have provided specific targets aligned with this outlook: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This perspective closely aligns with jpmorgan, which anticipates a stronger euro by the end of the first quarter of 2026. However, the desk’s outlook remains on the cautious side, considering the geopolitical tensions affecting economic indicators in the eurozone.
How other firms see it
Several firms, including jpmorgan and deutschebank, see the eurozone facing headwinds from external shocks like the Middle East conflict, which could weaken the euro further. In contrast, bofa takes a more pessimistic view, suggesting that a prolonged conflict might lead to more severe economic fallout for the eurozone.
Factors such as eurozone inflation data and the actions of the European Central Bank (ECB) will be crucial to watch as these developments unfold, with potential ramifications for Euro sentiment against the US dollar.
What the calendar says
Ahead of the June Eurogroup meetings, traders should monitor whether discussions lead to any new economic measures in response to the ongoing conflict and its impacts on the eurozone economy.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The Middle East conflict is exerting downward pressure on eurozone economic sentiment, as reflected in May's PMI data.
- 02ING reports a significant drop in the eurozone PMI, indicating slowing economic activity.
- 03The geopolitical situation is causing increased uncertainty, affecting investor confidence and spending.
- 04Upcoming Eurogroup discussions may impact future eurozone economic measures.
Market implications
Traders should keep an eye on the PMI levels, particularly if the euro slips below 1.07, which could trigger additional selling pressures. The upcoming Eurogroup meeting could yield new insights into targeted economic responses to the ongoing geopolitical tensions, which may further stimulate Euro sensitivity against the USD.
Risks to this view
A rapid resolution to the Middle East conflict could lead to a rebound in eurozone economic data and consumer sentiment, potentially invalidating the current bearish outlook for the euro. Additionally, a shift in ECB policy towards tighter monetary conditions could provide unexpected support for the euro.
Sources & References
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