In charts: Three scenarios for energy, macro and markets
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.
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.
How firms align with this view
Aligned with the desk view
Contrary positioning
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.
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.
Risks to this view
Key risks include a diplomatic resolution that rapidly unwinds risk premia, oil price spikes that trigger a demand shock, or a conflict that disrupts LNG supplies, hitting gas-dependent European economies disproportionately.
Sources & References
How we cover this story