Hawks Speak Out Collectively! Are Europe and the US About to Bottom Out?

Summary:

The surge in energy prices has exacerbated inflation risks and reduced the likelihood of Fed rate cuts, leading to a stronger US dollar and a weaker EURUSD pair.

BUY EURUSD

EXP

TRADING

1.15501

Entry Price

1.18000

1.13000

1.15138 +0.00037 +0.03%

0.0

Pips

Flat

1.13000

Exit Price

1.15501

Entry Price

1.18000

Fundamentals

On the euro side, the ECB will hold its monetary policy meeting next week, and markets are closely watching how policymakers will address energy cost pressures and the risk of economic slowdown stemming from geopolitical uncertainty. Latest policy signals suggest the ECB prefers a wait-and-see stance to avoid overreacting to short-term shocks, while some Governing Council members have stated it will "act decisively" if rising oil prices push up inflation.

The Iran conflict has lasted for about two weeks, and market concerns about potential supply disruptions in the Strait of Hormuz have driven oil prices higher rapidly. Rising energy prices may push up overall inflation through cost-push channels while restraining corporate investment and consumer spending, weakening economic growth momentum. However, if the conflict subsides quickly, this impact will be largely confined to the short term. In contrast, persistent supply disruptions will amplify second-round effects, especially against the backdrop of services inflation standing at 3.4%.

ECB policymakers have clearly stated that the recent fall in oil prices has provided breathing room for policy adjustments, but uncertainty remains. Any sustained rise in energy prices could alter the trajectory of inflation expectations. ECB Council member François Villeroy de Galhau explicitly stated that no rate hikes should be expected at next week's meeting. He emphasized the need for calm amid the Iran conflict.

The conflict has raised uncertainty, potentially bringing a mix of slightly higher inflation and weaker growth, but French inflation will remain low with no signs of stagflation. Another Council member Joachim Nagel noted that inflation risks have risen and the economic outlook has deteriorated, stating the ECB will act decisively if the energy price surge translates into persistently higher inflation.

ECB Governing Council member Gwido Zlatkesvić clearly stated that the geopolitical conflict and its spillover effects on inflation are forcing the ECB to potentially start raising rates earlier than expected. While he believes the ECB is currently in a "favorable position" and no action is needed at next week's meeting, he is particularly concerned that collective memories of the 2022 inflation shock have significantly lowered the threshold for corporate price hikes and consumer wage demands, with upside risks dominating the economic outlook.

Zlatkesvić further noted: "While I think the ECB's reaction point is closer than many think. I am reluctant to speculate whether it will be April or June, but we stand ready to act if needed."

The conflict's dual impact on the euro area lies in the coexistence of cost-push and demand-suppression effects. Rising energy prices directly push up production costs, likely weighing on services and manufacturing PMIs, while economic slowdown curbs demand-side inflationary pressures, creating a self-regulating mechanism. France's low inflation data reflects this balance, with its relatively moderate energy dependence and price transmission mechanisms avoiding a region-wide stagflation trap.

Nagel specifically mentioned that if the energy shock persists, inflation concerns will take precedence over growth slowdown, requiring policymakers to closely monitor wage growth and inflation expectations anchoring. Currently, euro area services inflation has accelerated to 3.4%, but YoY energy prices remain negative, indicating transmission has not fully spread. The ECB's adherence to a gradual approach is precisely to retain policy flexibility until data becomes clearer.

The trajectory of inflation expectations is critical to the Fed's policy decisions. Current market reactions show a divergent pattern of rising short-term and stable long-term expectations. Citi noted that short-term market inflation expectations have risen with gasoline prices, and short-term consumer inflation expectations may follow suit. However, the market's 5y/5y forward inflation expectations have actually fallen recently, reflecting expectations of slower economic growth and a weaker labor market.

Bank of America research has confirmed this judgment. Its analysis shows that over the past 50 years, market inflation expectations have been sensitive to oil prices on a high-frequency basis, but in most oil price surge episodes, the rise in inflation expectations failed to persist. Only a few cases, such as the post-pandemic Russia-Ukraine conflict and the 1999 OPEC production cut, triggered persistent expectations repricing.

Regardless of how the current oil price shock unfolds, both Citi and BofA emphasize that labor market conditions are the key constraint determining whether inflationary pressures can persist. Citi stated that a weaker labor market will limit firms' pricing power. It makes the second-round transmission of this oil price shock to core inflation weaker than in the post-pandemic inflation cycle.

Its latest forecast shows that core PCE inflation will rise by about 3.0% YoY in the Q1 2026, then gradually decline to around 2.4% by the end of 2026. This remains above the Fed's 2% policy target. Against this backdrop, BofA believes the Fed will most likely remain on hold in the short term.

If the oil price shock is limited in scale and duration—below $100 per barrel and lasting less than six months—the Fed tends to temporarily overlook energy price fluctuations. However, if the shock persists and strengthens, the stagflation risk of coexisting high inflation and slowing economic growth will put the Fed in a dilemma, potentially pushing back the rate cut timeline further.

Technical Analysis

From On the daily timeframe for EURUSD, Bollinger Bands are expanding downward with MAs diverging lower, indicating the overall downtrend remains intact. MACD downward momentum shows no signs of weakening, with the fast and slow lines continuing to run below the zero line, suggesting a high probability of further declines toward psychological levels (1.15) and recent lows (1.139). The RSI stands at 30, placing the market in oversold territory, which means a rebound is possible at any time but the probability of further downside is higher.

On the 4-hour timeframe, Bollinger Bands are expanding downward with MAs diverging lower, and the MACD lines have broken below the zero line and formed a dead cross again, signaling the pair is in a bearish zone. However, downward momentum has eased, and a rebound is imminent. The RSI is at 38, reflecting pessimistic market sentiment. In the short term, the bearish trend will not end without a valid break above the EMA12.

Therefore, the short-term strategy is recommended to buy on dips first and then sell on rallies.

Hawks Speak Out Collectively! Are Europe and the US About to Bottom Out?_1

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Trade Recommendations

Trade Direction: Sell

Entry Price: 1.15

Target Price: 1.18

Stop Loss: 1.13

Support: 1.15/1.14/1.13

Resistance: 1.17/1.18/1.21

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Hawks Speak Out Collectively! Are Europe and the US About to Bottom Out?

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